Do you consider yourself a better than average driver? Is your sense of humour better than average? The vast majority of people will answer yes to these questions, and this human trait of self-confidence is not restricted to driving or humour. It is evident in most fields of human endeavour, including investment decision-making for pension funds.
Eighty-six per cent of respondents to our recent survey of UK defined benefit (DB) schemes believe their current decision-making structure is effective. Yet the results of our survey show that investment decision-making structures have changed little, despite being faced with much greater choice and complexity in managing the investments. Two in five schemes do not have an investment committee. Even where there is an investment committee, the survey suggests there is little delegation of decision powers. Investment committees are primarily being used to do the legwork rather than make the decisions. And where decisions are delegated, multiple delegates are often cited, suggesting a lack of clarity as to who owns which decisions.
Self-confidence is an important trait for survival, but in a professional context it is also important to self-challenge. Regardless of your confidence in your current structure, best practice dictates that you continuously look for improvements. The following five questions may help you to do this:
- When was the last time you reviewed your governance/delegation structure and what events would trigger a review? With the increased focus on liability-hedging and greater interest in alternatives and alpha-oriented approaches, investing today is getting more demanding and challenging.
- How much time does your trustee board spend on investment-related matters? Is this too much or too little? Almost half of the survey respondents indicated that they spend more than 25 per cent of their trustee meeting time on investment matters. Arguably this is too much and may not leave enough time for other issues. Perhaps more surprising is that schemes with an investment committee spend as much time on investment matters as those that don’t have one.
- Who is responsible for each investment decision and which decisions do the trustee board get involved with? Approximately one in three respondents believe multiple groups are responsible for each of the different investment decisions. This indicates a lack of clarity and, ultimately, accountability. Also, the trustees get involved in the bulk of investment decisions, indicating a lack of appropriate delegation.
- Are there any weaknesses in your current decision-making structure? Forty per cent of respondents were not confident in their ability to respond quickly to new situations, which given recent market events seems a critical characteristic of any effective system.
- How could the different structures available help you address the weakness of your current structure? If governance structures are to evolve, decision-makers need a good understanding of their options. Given widespread coverage of fiduciary management, we were surprised that 75 per cent of respondents did not feel that they had a meaningful understanding of this subject.
Investors should not overlook the need to periodically review their investment decision-making structures. If nothing else, it may help demonstrate they are on the right track.
Sorca Kelly-Scholte is managing director, consulting and advisory services, EMEA, at Russell Investments.
