How can trustees and pension fund executives work well together?

Pardon the Interruption

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Trustees lucky enough to have an in-house executive function can rely on support, but views on how the relationship between the board and the executive should work can diverge and even cause friction.

Setting clear goals is the prerequisite for achieving them. But it appears executives in pension funds with an in-house function feel this clarity is lacking, while pension fund boards do not tend to share this view, according to mallowstreet’s recent Trustee Report.

Communication is crucial


Boards, the report found, are most concerned with the speed of decision-making rather than the practical issues of delivering a decision the trustees have taken.

This latter finding was surprising, says Judith Fish, a trustee at Dalriada Trustees, as the quarterly meeting schedule of trustees tends to slow decision-making down.

Having worked on the executive side of a pension fund before becoming a trustee, Fish, said the most important thing for funds with an executive function is communication, with trustees making sure that executives are “kept in the loop” on everything that is being discussed.

“It can be unhelpful if trustees go off and do things” without keeping executives informed, who as a result might duplicate work or not realise where the trustee is heading. 

She advocated greater delegation to the executive function in funds that have one, saying that trustees can be reluctant to let go of that control, suggesting that where trustees want to have the final say this can be done via email, with a pre-agreed number of responses needed, “so you don't need to wait for every single response”, as trustees can have other things to do and not respond for some time.

“You need to have a policy and process in place for reaching agreement,” she said.

Failing to do so can lead to delays on investment decisions, which can carry a high cost. She cites hedging, where schemes have sometimes been “sitting on the fence – that has cost schemes millions of pounds”.

In contrast, she says, “it is surprising that people get so hung up about adviser fees, not realising that not making a decision can cost them a lot of money”. 

Trustees should also ensure they have training before a meeting, so they are in a position to take a decision during the meeting.

Trustees should have exception reporting


But while there is growing pressure on trustees to understand the scheme in detail, their role is more akin to that of a non-executive director, argues Sally Bridgeland, senior adviser at Avida International and a former chief executive at the BP scheme.

“The regulatory pressure, and maybe from advisers, is that they need to be experts and need to be fluent in everything, which is an unrealistic hurdle. So it’s really important to draw the line and get the delegations right,” says Bridgeland.

She says trustees can delegate most things, which is something that was tested with legal advice at BP, but “delegation is difficult”, she notes.

However, trustees should realise that given their limited contact with the scheme their role is less than part-time. “Your touch points with the business are limited, so it’s much closer to a non-executive relationship,” she says, which requires “a different kind of feedback loop”. Instead, “we’re stuck in the days of, ‘We get reports on everything’… rather than the things that matter. We need exception reporting.”

What about the human factor?


Lindsay Hawkins, who heads up trustee executive services at Muse Advisory, said that while normally the trustee and its support function are aligned, “each is looking at the Scheme through their lens, so it’s somewhat inevitable that sometimes differences creep in”, for example differing views on the quality, cost or timeliness of advice, because the executives will have worked with the advisers, while the trustees only see the result.

People issues seem to be the main area where friction sometimes occurs, such as about the chairing style, but also a lack of clarity on roles, responsibilities and delegations and information flow.  

And the trustee itself might be divided on how to address a particular issue, so “the executive needs to be alive to nuanced behavioural issues to support the chair navigating successful outcomes. That’s not always easy,” said Hawkins, but shows that “pensions is all about people. The most successful Trustee and Executive teams, therefore, tend towards a high EQ (emotional quotient) to manage the inevitable frictions. The ability to challenge constructively, influence positively and keep open-minded are all essential when it comes to managing a Scheme successfully.”

What do you think is important for trustees and executives to work well together?