A 21st century trustee needs to be like an architect, but this is impossible without good regulatory foundations, finds Sara Benwell
If you’re building a house, you don’t just book the experts and let them get on with it. Instead, you need an architect to co-ordinate the various builders, plumbers, electricians and decorators.
In the world of pensions schemes, argues Raj Mody, PwC partner and founding director of Skyval, the trustee should be the architect co-ordinating a team of expert investment consultants, covenant advisers and scheme actuaries.
He says: “Trustees have to find the solution that works for their individual pension scheme, to connect up the elements and work out the right questions to ask.”
Even with individual advisors trustees need to be setting the agenda rather than the other way round. Or as Mody puts it: “When the painter turns up, you don’t just say ‘paint the bathroom’. You have to give them a brief.”
Trustees have to find the solution that works for their individual pension scheme”
Unfortunately, the current regulatory framework isn’t modern enough to support trustees in working this way, according to Mody. And most trustees are left relying on their advisers to provide direction without having the appropriate framework to set the agenda.
He says: “We need dramatic improvements in the way pension schemes are running themselves. Are we really going to say todays operating model is how you should run a pension scheme? Of course not!”
He points to the gap between investment consultants and actuaries as one example of how the regulatory model is not fit for purpose.
He says: You’ve got this 20 year old regulatory framework which just doesn’t work. Trustees have to separately appoint a statutory scheme actuary and an investment consultant. In this day and age you need both of those elements working together to meet your goals.”
“You’ve got trustees who are largely well-meaning, part-time amateurs, trying to operate within an intrinsically challenging regulatory framework that doesn’t lend itself to everything working harmoniously.”
You’ve got this 20 year old regulatory framework which just doesn’t work”
To a certain extent the Regulator has recognised this with its guidance on integrated risk management. The guidance explains that trustees need to evaluate all the risks faced by their scheme in a holistic manner.
The hope is that this will help them to see the bigger picture when it comes to scheme risk and instruct their advisors accordingly.
But Mody is concerned that the guidance will not solve the problem, and may actually do more harm than good.
He says: “I think that is a step in the right direction, but I have some concerns. Firstly – the label. I now worry trustees will think that integrated risk management is a thing. Integrated risk management is not a product that an adviser can sell. Instead, the decisions need to be right for each individual scheme. IRM is a prompt to do and think about the right things.”
He’s also worried that some of the examples given in the guidance might be misleading for trustees.
Integrated risk management is not a product that an adviser can sell”
He says: “Some of the steers were well meaning – such as check your VAR, but this is a far too simplistic measure of risk. It would be like going to your doctor and only having your temperature checked.
“I would be extremely worried if trustees thought that was it for integrated risk management.”
He thinks that full regulatory overhaul would be a hard ask and is unlikely to happen soon. Instead, he argues it is important that trustees are aware of the deficiencies in the model and can therefore act in a manner that overcomes them. One example might be to get your actuaries and consultants in a room together so they can paint you an integrated picture of risk.
Only by circumventing these barriers can trustees hope to develop a 21st century model. Time should be spent identifying where the gaps in any understanding of the scheme are, filling these, and then using that wider understanding to develop a brief for all advisors that allows them to work together.
Otherwise, trustees will end up as the architects that built a house that no one wants to live in.