Friday, 15 December 2017

    Taking Up The Challenge

    Our independent trustee survey 2017 not only shows how this increasingly important group of pensions professionals are thinking, but also points towards some broader trends in defined benefit and defined contribution scheme governance. 

    Challenges facing lay trustees

    We asked our respondents what they believed to be the biggest challenges facing lay trustees in 2017. This question was also included in our 2016 and 2015 surveys, and we’ve summarized the answers across all three years in the graph below.  There is some interesting variation, as the graph below shows. Independent trustees now believe that increasing regulatory demands are the biggest pressure on member-nominated trustees; more so than either the time required by the role or their overall level of knowledge.  This was also perceived as the biggest issue in 2015 (albeit not to quite the same extent as in 2017), perhaps reflecting the wealth of regulatory change in 2015 with freedom and choice reforms. While there haven’t been the same seismic shifts in regulation during 2017, general political instability this year coupled with the fallout from pensions events such as the collapse of BHS may be driving this year’s results.  Amongst independent trustees who were only responsible for DB schemes, this figure was even higher, with 58% of respondents saying that they believed keeping abreast of increasing regulatory demands was lay trustees’ biggest challenge.

    The belief that lay trustees have insufficient knowledge and experience is at its highest this year, and independent trustees with responsibility for both DC and DB schemes were most likely to feel this way. In this group, 42% believed this was the biggest challenge for their MNT counterparts, compared to 39% for the survey overall. 

    DB scheme priorities

    Professional trustees involved with defined benefit schemes are concerned with the financial viability of those schemes. As our infographic on pages 4-5 shows, the persistence of low real yields, strength of the sponsor covenant and the need to improve funding levels are their top three concerns.

    In investment terms, respondents expect schemes to adopt LDI strategies (60%), fiduciary management (39%) and income-focused strategies (41%) to address their concerns around yield, as well as in response to the current economic environment. However, with over a quarter of respondents (27%) citing sponsor covenant as their DB clients’ biggest challenge, investment factors alone are not the only issue.

    Respondents were divided over whether consolidation might be the answer to DB schemes’ concerns, with a very slight majority (55%) saying that smaller schemes should be encouraged to consolidate. However, amongst trustees that only work with DB schemes, this figure was lower (47%). The controversial issue of whether companies should be able to offload or reduce their pension obligations if the sponsor company is struggling divided our audience exactly in half, with 50% saying this should be an option for schemes, and the other half disagreeing.

    There are some precedents for scheme consolidation in recent LGPS pooling. Nearly half (45%) of respondents said that they believe LGPS pooling is a positive move, although 47% had no view on this at all.

    Issue2017 (%ages)2016 (%ages)2015 (%ages)
     Table 1 - The Biggest Challenges facing Lay Trustees

    Having enough time to fulfil their role

    14

    37.5

    25

    Insufficient knowledge and experience

    39

    29

    36

    Keeping abreast of increasing regulatory demands

    47

    30.5

    39

    Other

    0

    3

    0

    However, the message is much clearer when it comes to buyout, with 69% saying that they believe most DB schemes are now targeting this as an end-point for their scheme over the medium to long term.

    DC scheme priorities

    For DC schemes, member engagement is the biggest concern, as the infographic on pages 4-5 shows. With auto-enrolment minimums due to increase twice in the next two years and the 2015 pension reforms placing more responsibility on individuals when deciding how to manage their pension savings after the age of 55, perhaps that is to be expected.

    The survey revealed that independent trustees’ DC clients are planning changes to their default funds in ways that are likely to reflect the 2015 freedom and choice reforms. Changing the de-risking asset mix (44%), incorporating drawdown (41%) and changing the growth asset mix (30%) were the three most common ways in which respondents expect their clients to make to enhance their default funds over the next two years. 

    However, more significant structural changes, such as introducing alternatives (15%) and investing in target date funds (13%), are of less immediate concern. This suggests that DC scheme trustees are tending towards amending existing default funds to meet future needs, rather than introducing completely new structures. The challenges of liquidity, daily pricing and access from fund platforms, as well as scheme asset size, are still likely to limit the use of alternatives in DC in the immediate future.

    Governance standards are more of a concern for DC schemes than DB. This may be driven by increased emphasis from the Pensions Regulator on DC governance, as well as the increased significance of DC in the workplace generally. Only 4% of trustees listed this as the most significant concern in the DB schemes that they work with, compared to 20% of those who work with DC trustees.

    Relationship with consultants and asset managers

    Independent trustees are generally content with the quality of advice provided by their investment consultant, with 66% saying that they rate this as either good or very good (12%). However, that does mean a third of trustees were less enthusiastic and viewed their investment consultant’s advice as either neutral (26%) or poor (8%). Trustees who were only responsible for DB schemes were marginally more positive, with 70% rating their consultant as very good (25%) or good (45%).

    When it comes to rewarding asset managers, performance is equally important, with 41% of respondents saying that they prefer a performance-related fee structure to an AUM-based charge (29% preferred this second approach). A further 30% expressed no preference between either AUM- or performance-based charges.

    An emphasis on performance and stability is also reflected in the factors that trustees consider important when appointing a fund manager. We asked respondents to rank a list of 11 factors that could be used to assess a fund manager prior to appointment, in order of importance (where 1 = most important and 11 = least important). Performance track record was the top criterion, with an average score of 3, followed by stability of the investment team (3.37) and fees (5.02).

    There were some notable differences in priorities between trustees who worked for both DB and DC schemes, and those who only worked for DB schemes. In the latter group, stability of the asset manager was the most important factor (average of 2.74 for this group), followed by performance track record (3.0) and client service (4.5). Fees were the fourth most important factor for this group (4.55). Those who worked with both DC and DB schemes believed the consultant’s view and ability to take a responsible investment approach were more important than did the respondent group as a whole.

    CriteriaRANK – ALLRANK – DC and DBRANK – DB only
    Table 2 - Factors Affecting the Choice of a Fund Manager
    Performance track record

     

    1

    1

    2

    Stability of the investment team

    2

    2

    1

    Fees

    3

    3

    4

    Client service

    4

    6

    3

    Consultant view

    5

    4

    7

    Takes a responsible investment approach

    6

    5

    6

    Corporate/brand reputation

    7

    8

    5

    Availability of a pooled fund

    8

    7

    8

    Pre-existing relationship

    9

    10

    9

    Total size of AUM of the manager

    10

    9

    10

    Willingness to offer a segregated portfolio

    11

    11

    11

    Improving standards

    We asked respondents what single thing the schemes they worked with could do better.  Across the whole group of respondents, the most common response by far was ‘make decisions more quickly’ (35%), followed by ‘improve investment knowledge’ (17%).  However, amongst trustees who only worked with DB schemes ‘Improve collaboration with the corporate sponsor’ (25%) and ‘Become more independent of the corporate sponsor’ (also 25%) were a greater focus, again reflecting issues around covenant. Are independent trustees and the schemes they serve feeling a ‘Brexit effect’, or has the fallout from BHS’s collapse made boards more vigilant when it comes to the sponsor covenant?

    For the first time this year, we also included an option related to ESG credentials, but this did not make it to the top of the list of priorities for any of our respondents.

    We also asked broadly similar questions in 2016 and 2015.  In 2016, “Make decisions more quickly” was also the highest-ranked answer to this question (27%), followed by “Improve collaboration with the corporate sponsor” (23%). 

    Criteria201720162015
     Table 3 - What single thing could the schemes that you work with do better? 

    Make decisions more quickly

    35

    27

    29

    Improve governance

    10

    18

    10

    Improve investment knowledge

    17

    18

    27

    Pay less attention to the investment consultant’s view

    1

    0

    2

    Become more independent of the corporate sponsor

    13

    12

    2

    Improve collaboration with the corporate sponsor

    23

    23

    29

    Improve ESG credentials

    0

    N/A

    N/A

    *in 2015 and 2016, ‘pay more attention to the investment consultant’s view was included, with a 2% response rate each time.

    Conclusion

    The economic and regulatory changes that have affected both DB and DC pension schemes over the last two years are borne out in independent trustees’ responses to this year’s survey. Professional trustees of DC schemes are focused on member engagement above all else, with default fund changes and improving scheme governance also high on the list.  DB schemes are more concerned with the need to focus on the sponsor covenant, while also addressing the current economic climate.  For these schemes, LDI and income-focused strategies are likely to play a major part over the coming year.  However, one thing has remained resolutely consistent with previous years’ surveys: independent trustees still believe that the boards they work with are too slow when it comes to making decisions.

     To Read the full report click here

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