Necessarily August brings a lighter workload and the opportunity to dive deeper into the questions the DWP are asking the pensions industry. I am using this month to write responses which are personal and reflect the views of my colleagues at AgeWage.
I hope that by publishing these responses, I will encourage more people to do the same. I am not expecting your views to coincide with mine, but whether they do or not, I would be happy to read them – either posted in comments, or on the AgeWage and Pension PlayPen linked in group or emailed to me at email@example.com
Here are my responses to the DWP’s call for evidence on
Pension trustee skills, capability, and culture
- Do trustees know what the knowledge and understanding standards expected of them are? The standards of training, knowledge and understanding of UK pension trustees is generally high, but the proliferation of schemes makes their capacity to improve member outcomes limited. Most trustees do not have the time to do the multiple jobs they are asked to do, whether that be trustees for multiple schemes or take on pension work as an ancillary activity to the day job.
- Do trustees currently meet the knowledge and understanding requirements expected of them? Are some types of trustees better than others? There are arguments for lay trustees (diversity and common sense) and for professional trustees (expertise). If compliance is paramount then professional trustees are “better”, if we take diversity seriously, we must allow for the voice of amateurs.
- What are the barriers to improving trustee capability? What do you think government should do to ensure that all trustees meet the standards expected of them? Does trustee liability put off potential trustees? Trustee liability is rarely tested, very few trustees have been sued over the past thirty years and the regulator’s limited capacity to bring errant trustees to count suggests that they have “powers” but not power.
- Do trustees (including Master Trust trustees) have the right knowledge and understanding to invest in the full breadth of investment opportunities? If not, what can be done to improve this? Trustees do not originate investment strategy, they approve (SIPs) and monitor it (implementation statements). They do not stand in the way of broadening investment opportunities; the problems lie elsewhere. Trustees must be released from the servitude of the AMC and the DB funding code and be allowed to invest with less constraints. This is not just a matter of the charge cap, it is a function of the market-place, commercially successful DC schemes prosper from low charges, that needs to change for trustees to invest more broadly. A comparison between the constrained behaviours of DC and DB trustees in the private sector and the fund committees of the LGPS is instructive,
- Is there enough understanding of advice around the consolidation of schemes? Trustees are typically proud of their work and an admission that a scheme is not providing VFM to the sponsor and more importantly members, is hard for them to make. The low level of compliance amongst trustees of DC schemes with less than £100m in assets suggest that the trustees of small DC occupational schemes are unwilling to consolidate. It is not a matter of understanding; it is a matter of incentives. Turkeys don’t vote for Christmas
- Do you think that the government should require all trustees to provide information to enable TPRto keep a register of all trustees? It is very odd that this does not happen already. Scheme returns should include an up-to-date list of trustees in a format that allows the information to be readily transferred to a digital register. That register should be as accessible as the lists of Directors to be found on the Companies House website. In a single word “yes”.
- If the government were to require this information, would it be best achieved through the scheme return or through a separate trustee return? The scheme return
- Do current accreditation frameworks provide a high enough bar to equip trustees who become accredited to properly fulfil their role, including in making investment decisions? The commercial imperative to raise the bar for trustees comes from the commercialisation of the trusts themselves. Active company pension funds are now sufficiently rare for their trustees to be required to justify their on-going existence. What is more worrying are inactive plans, particularly DC plans, which are little considered either by the sponsor or the regulator. These should be the principal target for consolidation as this is where the worst standards of governance are found. Locating and consolidating small schemes is a task for the VFM Framework and won’t be solved by better accreditation of trustees.
- What proportion of your trustee board are accredited trustees? I have no idea, we save into Nest – is this a metric that sponsors or members are expected to have access to?
- If we required each scheme to have a certain proportion of accredited trustees, where should this bar be set? Should Master Trusts be required to have a greater proportion of accredited trustees than single-employer schemes? I think that schemes should be required to have equally good governance whatever their commercial plans. Ideally, all trustees, including lay-trustees should be accredited. We assume TKU would ensure that accreditation was a low-bar.
- Should there be more rigorous requirements for those acting in the capacity of a professional trustee? What sort of requirements/standards should professional trustees be meeting? Should there be mandatory accreditation? These questions are difficult to answer, they assume we have a benchmark and a rulebook. That is fine for contract-based arrangements but trying to impose standards and rules on trustees, rather defeats the point of the broader concept of the fiduciary duty. Government should be wary of over prescriptive approach in this area.
- How would you define a professional trustee for the purposes of legislating for all professional trustees to be accredited? A trustee who plies his expertise for money
- What are your observations on the external support trustees are given to make investment decisions, particularly in relation to unlisted equities? Investment consultants can provide this support but few do, in general DC investment consultancy is pitched at the problem funders have, which is to ensure that what remains of the AMC after pay-away to fund managers, is sufficient to make the scheme prosperous. Most DC consultancy is run on a tight budget that does not allow for supporting difficult investment decisions.
- What changes could be made, including to the regulatory environment, to improve trustee support in relation to unlisted equities? We need fewer schemes which compete for long-term value and are assessed for VFM not just “M”. Trustees should look to the LGPS for such an environment.
- To trustees: To what extent do trustees use investment consultants to support decisions around allocations to unlisted equities? Did they subsequently increase? Is there a deficiency of knowledge or expertise by investment consultants of these types of investments? N/A I am not responding as a trustee.
- What changes could be made to investment management to support pension scheme investment decision-making? Greater transparency on valuation policy, overt and covert fees and gating. Daily liquidity shouldn’t be required but clarity on the redemption policy would be helpful for trustees.
- To trustees: How does legal advice impact on your investment decisions? What is an acceptable level of tolerance for investment risk? Is there a culture of ‘risk aversion’? n/a
- Is fiduciary duty a well-understood concept? Do current regulations and guidance support trustees to make investment decisions which seek higher returns for members? If not, what changes would be useful? Fiduciary duty is generally understood to be about protecting members from harm, not about finding opportunities which are valuable. We take the “change of mindset” requested from TPR to be about encouraging value. We note however that the risk aversion that TPR is complaining about is as a result of decades demanding risk reduction from the same TPR. It is important that TPR’s guidance makes it clear that fiduciary duty works both ways.
- Do trustees currently make investment decisions in the long-term interests of pension savers? If not, what barriers are there to trustees making investment decisions in the long-term interests of savers? No they don’t, most trustees consider the downside of risk taking but too rarely the upside. The barriers are partly behavioural but also the fear of criticism from regulators, press , sponsors and members,
- How do trustees balance investment returns, costs and charges, and services when making decisions in the long-term interests of savers? With difficulty. What is required is a net performance measure which takes into account the member’s experience. We recommend the use of member calculated IRRs , benchmarked against the common experience of members
- Do trustees’ fiduciary duties discourage investment in alternative asset classes? If so, please explain with examples. No they don’t, they simply reinforce the need for hiqh quality trustees
- Is the way in which trustees exercise their fiduciary duties preventing trustees from seeking the best returns for pension savers? If so, what is causing this? Yes they are, trustees are required to execute strategies that are proposed by funders meaning that too often , they have to implement sub-optimal strategies that take little or no risk.
- Do those actors who have most influence on advice to trustees on long-term investment decisions experience any cultural challenges or barriers in provision of their advice on illiquid assets? If so, what would unblock this? Most investment consultants and lawyers advising trustees, do so with an eye to risk. In DC the risks to trustees are clear, liquidity, reputation and most importantly – detriment to members. Successive problems with the gating of property funds, Woodford and the perception that there are “hidden fees” in illiquid investments, have meant these advisers err on the side of caution. Especially in DC, where the thrust of this consultation is directed, this has meant that where good ideas are put forward, they are rarely adopted. The LTAF will do something to move the dial but not enough. Behind the caution is the commercial reality that VFM is still perceived as residing in the headline AMC. So long as this perception persists, most DC schemes will not adopt illiquid assets , we will have to wait for consolidation to happen for that to change.
- Would trustees find it helpful if they received more direction from regulators when assessing their investment decision making? In addition to our work on Value for Money we are also interested in whether the advice for trustees provided by regulators via training and guidance supports our objective to shift the focus from cost to value? This would be helpful, we need more than training, we need a new “mindset” from both trustees and regulators. Do not underestimate the time and effort it takes for that to happen
- Do lay trustees have enough time and support to perform their duties effectively? Do professional trustees? If not, what changes would support this? The answer is generally “no”, we need fewer schemes with better fiduciary budgets.