Lessons from management experts on how trustees can govern effectively in a complex world

Trustees have never been busier – wave upon wave of regulation alongside new technologies and investment strategies has led to huge disruption in the pensions industry. What is more, the very nature of committee-style boards that often only meet once a quarter has left many struggling to wade through a pile of decisions.

Yet both defined contribution and defined benefit trustees shoulder the burden of the financial futures of their members, and keeping the end goal in sight is crucial. Fortunately, organisational psychology (the psychology of work) has been exploring board dynamics and decision making, and there are key lessons that can help trustees.


Management expert Cary Cooper, professor of organisational psychology at Manchester Business School, says that board dynamics are crucial.

In an ideal world, management philosophy suggests that board members should be cherry-picked so that there is complementary expertise.


Cooper explains: “It’s starting from scratch and saying ‘Who do we need? What expertise do we need?’ and picking the right people for that.”

David Weeks, a member of the Association of Member-Nominated Trustees committee, says this approach is also endorsed by the Pensions Regulator. “Composition is a matter that boards and the chairman need to pay attention to. Guidance from the Regulator emphasises the chairman’s role in ensuring an adequate spread of interests.”

The problem is that the chairman of trustees doesn’t usually get to choose who he wants on the board”

Unfortunately in pensions, this is not always easy to achieve, says Terence Prideaux, an independent investment consultant. “The problem is that the chairman of trustees doesn’t usually get to choose who he wants on the board. There tends to be – probably quite rightly – a democratic process from members and employers. So quite often the chairman says: ‘This is a badly balanced board but there’s not much I can do about it for the next three years.’”

There is also a tendency on some pension boards to have what Richard Butcher, independent trustee and managing director of PTL, describes as “trophy appointments”.

From a management perspective this can be a disaster. Cooper says: “This is not only a pension fund problem, but sometimes a board problem, because frequently the great and the good are put on. These are people who are known, but not people who are necessarily tasked with fulfilling a particular role.”

[It] makes you wonder why lay trustees are prepared to take on the role in the first place”

“This leads to a group of people with no direction, who don’t have the time to learn about investment strategy or the latest regulation because they’re busy.”

Another issue can be getting trustees on board in the first place, explains Paul Couchman, managing director of Premier Pensions Management.

“When you look at all the topics – from protecting your members against pension scams, funding, governance, corporate changes and transactions, winding up your defined benefit scheme, new duties for defined contribution schemes, investment management, risk management, managing your hybrid scheme – it is clear to see that being a trustee is a highly responsible role. As such it also covers personal liability and responsibilities, which makes you wonder why lay trustees are prepared to take on the role in the first place.”

Boards sometimes have difficulty in filling the vacancies

Weeks agrees that recruitment can be an issue. “One of the problems I’ve encountered is that some boards, especially those with employee representatives, sometimes have difficulty in filling the vacancies.

“Therefore they have to have people who are willing, rather than people who have a background in these things. It’s important to give them the opportunity to make sure that they can get up to speed, so that they can put forward a coherent view.”


Many pension fund schemes are good at ‘dividing and conquering’, creating sub-committees for issues such as investment, says Prideaux.

“If you’re a decent pension fund you’ve an investment committee and an audit one and other committees possibly purely for regulatory purposes. You’re trying to provide a degree of expertise by putting them into smaller groups and giving them responsibilities.”

divide and conquer

Source: Flickr

This approach allows the chairman to ensure that the board is covering the greatest possible set of knowledge, and that trustees’ expertise is being used in the best possible way.

You’re trying to provide a degree of expertise by putting them into smaller groups and giving them responsibilities”

During this stage, it is important to ensure that your trustees have a psychological contract in place, where they understand what their role will be, says Cooper.

If trustees have a clear understanding of why they have been included in the board, they will find it easier to stay on track.


Once the trustees are assembled, they need to have appropriate training.

Continuous educational training is a key feature of good management, but something that is often overlooked by pension funds, explains Cooper. “If a trustee needs training for maybe a more specialised expertise in terms of investment strategies, etc, then make sure they get the training to find out what actually is going on – whether it’s an appropriate conference or something else.


“Trustees are rarely given training. They’re on-boarded and told about the pension fund itself, but they don’t necessarily get continuous training, and they should. It’s like any other job.”

For member-nominated trustees, this is particularly important. Getting up to speed for a new trustee can be a time-consuming process, says the AMNT’s Weeks. He explains that when he first completed the trustee toolkit for both DB and DC, it took him 400 hours.

One major problem faced by MNTs is keeping their knowledge up to scratch between meetings. The Regulator requires trustees to both gain and refresh their knowledge but in practice this is unenforceable, says Weeks.

Trustees are rarely given training”

One issue, he argues, is that the majority of trustees are not paid. And with many juggling day jobs the impetus to stay on top of things is often lacking.

Training can be formal, for example through Pensions Management Institute courses, but it can also involve activities such as attending conferences. Employers should be encouraged to allow trustees the time they need to gain the necessary knowledge and experience.


Even the ideal board described by Cooper would have knowledge gaps, which is why external consultants are so important. Hiring the right people can be tough, and even once they’re in place, there can be problems.


Source: Flickr

Prideaux says: “What’s really a problem is you’re limited to about a maximum of ten consultancies, and there is a degree of ‘herding’. Not because people go from Towers Watson to Mercer or the other way round, but because we’re all in the same sort of business. We’re all in the same sort of regulatory framework and we’ve all got access through our computer to huge amounts of broadly similar data.”

He believes that the answer may be for trustees to engage with industry experts outside their retained consultancy firm, particularly when looking at niche areas such as forestry or agriculture.

We’re all in the same sort of regulatory framework and we’ve all got access to huge amounts of similar data”

He points to new entrants to the market such as City Noble (for whom he has done some consultancy work), which can provide access to a panel of experts.

Short-term expert advice, he argues, would limit the effects of herding and give trustees access to more in-depth, sector-specific advice from specialists.


Even when the board is assembled and experts have been brought in, decision-making is not straightforward.

Couchman explains: “Trustees are vital to providing good-quality trust-based pensions but it can be a thankless task. The complexity of schemes and the regulatory and compliance requirements are making the role ever-more demanding, and the vast majority of trustees are unpaid volunteers.”

The vast majority of trustees are unpaid volunteers”

While sub-committees can help, trustees still have mountains of decisions to make, and little time to do it.

It’s also very easy to get distracted from the task in hand, whether it’s a consultant pushing for a new strategy or market volatility in China.

It is often difficult to tell what is important and what is just noise.

Butcher gives the example of longevity swaps versus diversified growth funds (DGFS). Both are complex tools, which many trustees feel they need to understand. But the former, argues Butcher, is a genuine innovation, whereas the latter is a marketing twist on the balanced funds that were common in the 1990s.


Source: Photo via Flickr

He explains: “The reason I make that distinction is because longevity swaps probably genuinely require trustees’ time, whereas the second trustees can probably afford to put to one side.”

We are in the business of investment so the investment managers are constantly launching products”

Prideaux agrees that the volume of investment products can be confusing. “There are a number of weaknesses in the system. One is that we are in the business of investment so the investment managers are constantly launching products – the ‘investment idea du jour’. And one of the reasons for that is that these are driven by marketing people.”

Couchman argues that trustees should not panic, as they are not supposed to be experts. “Fortunately trustees can call on an array of advisers to support them by providing technical advice, guidance and good-quality services to ensure that schemes are well run and perhaps most importantly, secure.

Although trustees are not expected to be experts, they are expected to understand their key duties, which are to:

  • act in line with the trust deed and rules
  • act prudently, responsibly and honestly
  • act in the best interests of beneficiaries
  • act impartially.

However, consultants hired to provide clarity can muddy the waters instead. The problem, suggests Butcher, is that they don’t get in front of their clients very often, so when they do they are keen to prove their worth. This usually takes the form of overloading trustees with information, making it even harder to stay on track.

He explains: “This can be that it isn’t relevant to this particular case and isn’t material to us making a decision. So it fills time we haven’t got and it distracts us from the real matter at hand and as a consequence it creates distracting noise that may actually lead to us making a poorer decision.”

It creates distracting noise that may actually lead to us making a poorer decision”

Roger Cooper, director, Pi Pension Trustees and member, PMI Trustee Group, agrees that consultants can sometimes lead trustees astray. “Trustees have to be alert to the risk that their actions are being driven by the need to be compliant. It could be that their governance ends up being diluted to a box-ticking exercise that absorbs their time and diverts them from the really important strategic challenges.

“Often advisers drive meeting agendas and trustee business rather than the trustees dictating when and how they use their advisers and maintain a focus on their strategic objectives.”

Often advisers drive meeting agendas and trustee business”

Butcher says that trustees must be firm: “Trustees need to be brutal. They’ve got to be prepared – if they spot their adviser going off track – to tell them to shut up.

“Incidentally, chairmen of trustees need to be prepared to do that with their co-trustees as well,” he adds.

Taking the passenger seat

The old wisdom goes that if we want to make complex decisions, we need to sit in the driving seat. If true, this would leave trustees, and in particular trustee chairmen, with the ultimate responsibility for all the decisions that need to be made for a scheme, no matter the size.

However, in a TEDtalk (the renowned series of speeches dedicated to inspiring with new ideas) – Sometimes it’s good to give up the driver’s seat – neuroeconomist Baba Shiv presented research that people can make better decisions and solve more problems when they take a passenger approach.

The experiments were designed to test the validity of the adage that when you’re making decisions, it’s best to be in control. What Shiv found was that often people who made all the decisions not only solved fewer problems, but that they also put less effort in solving problems in the first place.

Shiv couches the research in terms of puzzle solving, but he also believes it can apply to financial decisions.

He puts the results down to what he calls the INCA, an acronym which describes the nature of the feedback you’re getting after you’ve made an incorrect decision. The feedback is immediate (you know if you have solved a puzzle); negative (when you fail to make the right decision); concrete (there is no ambiguity about success and failure); and you feel a sense of agency (you are responsible for the decision).

Facing this ‘INCA feedback’ makes people focus on the foregone option, casts the decision in doubt, reduces confidence in the decision and reduces confidence in the ability to solve other puzzles. Overall it makes people solve fewer puzzles than those who have some decisions taken out of their hands.

For trustees, this likely means that by trusting experts and advisers to make some decisions, they can focus on strategic issues, and are likely to solve more puzzles than their counterparts who take responsibility for every decision affecting the scheme.

Cary Cooper suggests trustees take a more strategic approach, sitting down and identifying the main priorities.

Gareth Connolly, trustee consultant at Towers Watson, agrees: “Focus on what will have the most impact. For example, don’t fret over which manager will perform best for a particular mandate if you’re not comfortable with the scheme’s overall investment strategy.

“Sort out the high-level strategy and then focus on the detail. Accept that change is inevitable and see it as an opportunity to do things better.”

Sort out the high-level strategy and then focus on the detail”

For Butcher, it often helps to evaluate audiences: “You need to have a priority order in your mind. Who’s important? Well, first and foremost, the members.

“If you can’t get through all the work, you have to say, this isn’t a priority, let’s come back to it when we’ve more space and time.”

Overall it is imperative that trustees remain calm and remember that they are not meant to be experts, but instead to deliver the best value deal for the members.

Be realistic about what you can achieve with the time, resources and budget available”

Weeks explains: “At the end of the day, the financial crisis wasn’t caused by lay members of boards not being up to speed, it was caused by professionals who were over-exuberant in some of their pet enthusiasms.

“We’re not there to replicate the skills of professional investors or investment consultants or managers. We’re there to represent the views of ordinary members and to make sure that the trustees are following policies that make sense to an informed lay person looking at the state of the economy.”

Connolly has one final piece of advice for trustees: “Be realistic about what you can achieve with the time, resources and budget available. As they say, don’t try to boil the ocean! And finally, don’t lose sight of a trustee’s primary duty – to pay the right benefit to the right member.”