A panel of professional trustees discussed the findings of the Engaged Investor and Newton Independent Trustee survey
Nick Boyes, independent trustee, and director of Able Governance
Giles Payne, Director, HR Trustees
Julian Lyne, global head of distribution, Newton Investment Management
John Arthur, managing director, AllenbridgeEpic
What is the biggest challenge facing your clients, and what are you doing to address this challenge?
Julian Lyne In a world of low yields, and low potential returns, how does a pension scheme trustee marry the need for return to pay pensions with the need to be conscious about risk? In a world where you’re striving for returns there’s a danger that you end up taking more risk then you realise. Understanding the balance between risk and return, the lower return environment, and understanding the parameters of the actuarial valuation is really a big challenge for trustees of all pension schemes.
Negativity in the press affects people’s participation, probably starting with the Maxwell scandal
Giles Payne I agree. A classic case in point is high yield bonds. Historically people have been expecting a return from gilts and credit at a certain level. To get thatreturn that they’re now willing to go down the credit ratings into high yield, and they’re not really factoring in the levels of risk. The levels of risk haven’t really changed, it’s just the magnitude of returns has come down.
John Arthur It is difficult because a lot of funds are pushing to higher risk. High yielding bonds, emerging market debt, etc as part of their fixed interest strategies. Eventually quantitative easing has pushed all assets higher, when it begins to turn around they will be correlated on the way down as they’ve been on the way up and it may well create a difficult environment for pension funds.
Nick Boyes The current low yields are presenting challenges for all schemes. The other big challenge is to help to determine value for member, and to summarise this in the chair’s statement.
Do you think that due to the increasing regulation, there is still a place for lay trustees?
Giles Payne Lay trustees have a difficult job, but they are not equal. So in some of my schemes I have highly qualified engineers, project managers, finance people who can look through pension schemes pretty clearly, and as long as they’ve good guidance around legislation requirements, they can really add to the discussions. Where you’ve got people with nontechnical backgrounds who aren’t used to assimilating data and information and reaching conclusions from that, that’s where the real struggle comes.
Nick Boyes Lay trustees continue to add value in terms of understanding the history and culture of the company and providing an insight into the members’ views of the scheme. The MNT selection process is worth looking at – the communication and selection process should seek to ensure that potential nominees are able and willing to put in the necessary time into getting up to speed and maintaining this knowledge.
John Arthur The investment and legislative requirements of lay trustees are increasing. However, there is a role for lay trustees in governance because the concept of the prudent man is an important and useful one. If lay trustees have the ability to say ‘why?’ and ‘I don’t understand’, that is a big benefit to the governance of a scheme.
A staggering 93% of our survey respondents think that negativity in the press will detrimentally affect people’s participation in pension schemes. Do you agree?
Julian Lyne Where lay trustees can play a vital role is that other scheme members take some value in the fact that one of their own is on the board. They can ensure there is that connectivity between the workforce.
Giles Payne It feeds through to a sort of distrust in financial services as a whole. When you hear about the complexity of pensions and investments it’s perceived that the complexity is there just to confuse them. It’s important for the industry that we manage to get clear simple messages out. We need for them to understand that it’s saving for their future rather than feathering the nest of rich people in the City.
Nick Boyes I do think that negativity in the press affects people’s participation, probably starting with the Maxwell scandal, Gordon Brown’s tax raid and the mis-selling scandal, but also more recently with the BHS and the Bernard Matthews situations. Getting a more positive spin in the press would help give pensions a better reputation – but where’s the news value in that?
Our survey respondents believe 74% of DB schemes are targeting a buy-in or buyout in the medium to long term. What should independent trustees be doing in the short term to work towards this?
John Arthur You must begin to prep the trustee board up to two or three years in advance, and that includes things like cleaning membership data to make sure you know what your liabilities are. It’s not just looking to control volatility of your assets against your liabilities. It’s thinking about what illiquid assets you have already. If you’re going to a buyout, will the insurance company value those assets or will they deduct the liquidity premium that you had if they are forced to take them? There’s a whole set of decisions around a complex area. So it’s about getting the decision-making board in a place where they are comfortable in getting the data in a place where it is it is clear for decisions to be made.
Julian Lyne Buy-ins and buyouts are really specialist, so to have someone on the trustee board who understands the dynamics must be very reassuring to the trustees. Although there are consultants involved, when you’ve someone truly independent who doesn’t have an axe to grind who’s had some experience of doing this work, it really pays testament to the value that the independent trustee can bring.
Nick Boyes As an independent trustee who has been involved in hundreds of windups, I exhort my fellow trustees to get the member records and benefit specification in order. This helps to flush out any issues while there’s still the opportunity to set things right. Further steps are to help to align the scheme’s investment strategy to correlate to annuity prices – typically corporate bonds. This might not be possible in one step, but a flight path can be adopted so that this position is reached in the foreseeable future. It is also worth collaborating with the sponsoring employer over liability-reduction exercises, such as enhanced transfer values.
What do you think about the ongoingdevelopments for LGPS?
John Arthur It is giving economies of scale – against that needs to be set the operational costs of setting up a pooling structure, and particularly the governance structure. The pools that are the most successful are those that have the best governance structure in place. The LGPS sector has been moving fast, it’s been an incredible transformation.
Julian Lyne There’s a little bit of a danger that value for money equals low fees. I think we must make sure that in this rush to get fees down, we don’t create challenges in terms of the investment.
Giles Payne It’s really important to try and get the cohesion and the quality of a governance for each sort of scheme level to feed into investment. Historically, there’s been a slight gap there and I think that’s only going to be increased if you’re looking at increased complexity and solutions. The other question is, if this proves to be successful how much further is this going to go beyond just assets? Administration, or other forms of governance within the sector? Because at the moment there are a good number of similar organisations trying to do a similar thing in a number of different ways. So there has to be the question of whether the pulling together into a more centralised solution is continued.
To read the full research report, click here.