Investment is an area that can absorb significant amounts of trustee time due to its complexity and potential impact on a scheme’s funding level in DB, but it is also one where trustees might feel they lack expertise. How can good investment governance bridge this gap? 

 

Good decision-making is crucial in investment matters for both DB and DC, as the consequences will affect either the employer, employees or both, but what that means in practice is often less clear. 

 

 

Master trust Nest has advertised two vacancies on its investment committee. It aims to fill these with people who have both investment expertise and complementary skills. While one person should have  “deep knowledge of a number of asset classes and ideally some experience of investing in private markets”, the other “will have had experience, in some capacity either [as] a DC pension member facing role (whether as a pensions manager, advisor or trustee); or a compliance and/or operations role within a regulated investment or pensions organisation”.  

 

Chief investment officer Mark Fawcett said that as the £7.5bn scheme is growing, it wants to ensure that the investment committee has the right skills to support Nest and get the best outcomes for members. 

 

Nest runs an annual analysis of the skills, knowledge and experience of its board and committee members to identify and assess skills and diversity, training needs and succession planning. 

 

“We assessed the results of the 2018 review and a decision was taken by the Nominations and Remuneration Committee that as the investment strategy evolved, co-opting non-Board Member technical expertise to support the Investment Committee would be an appropriate evolution of the investment governance and oversight framework,” said Fawcett. This decision led to the two roles being advertised. 

 

While the first of Nest’s person specification for these roles appears to be a straightforward investment profile, there is less clarity around the background of the latter. Both must have senior experience of investment management – but one can also have a compliance background, which is usually legal. The second person should have had a member-facing role but can be an adviser, a role which is not typically visible to members. 

 

 

Nest is hardly alone in this dilemma of finding a combination of skills. The industry seems to struggle with the question about who is well placed to make good investment decisions because regulation, liability and membership profile and relationship with the sponsor all feed into this, going beyond what a traditional investment professional might take into account. 

 

Julia Land, a board adviser at governance specialists Muse Advisory, says that when making new appointments, “being clear on what you’re looking for helps”. This avoids hearing only from candidates with the same skills and background as those already present on the investment committee but might require thinking more broadly about the experience that is sought and where to look for it. 

  

Combining investment skills with core trustee skills on an investment committee, using effective questioning and good challenge is the aim she says. This should help to avoid group think, share responsibility for decisions and ensure recommendations are well tested and in members’ interests. 

 

Investment decisions should be put in the context of agreed objectives and beliefs, so a decision forms part of a journey. “This reduces decision friction, delay and costs,” says Land. 

 

  

For Alan Baker, a director at professional trustee firm Law Debenture, the willingness to learn is almost more important in making appointments than previous experience, which means training becomes key. 

 

He has observed a shift over the past few years in investment discussions, away from focusing on manager selection towards adopting a broader strategic perspective and shift to risk management. This means skills and experience other than investments have become more important. 

 

Despite a greater diversity of backgrounds for investment decisions, these are usually agreed after some discussion or challenge, says Baker. “In most cases you come to a conclusion, it’s unusual that you need to go to a vote.” 

 

Alan Baker