Tuesday, 1 March 2011

A response to Mercer’s Trustee survey

A recent survey by Mercer of 119 Pension schemes and 800 trustees revealed that around one third of trustees monitor the sponsor covenant only annually - or even less frequently. The integrity of the sponsor covenant is essential and I am surprised that any trustee could believe that the job can be done without monitoring it closely. However we do need to make a distinction between having a regular (e.g. annual) process which includes an element of sponsor challenge on the one hand and the more informal but continuous “keeping an eye” on the Sponsor’s business performance and their attitude to the Pension fund on the other. In the past it seems that many funds watched their funding ratios gradually PA Mar 11decline but were reluctant sufficiently to challenge sponsors to rectify matters. Funds do not usually go from being healthy to being in trouble overnight. An important part of the “monitoring the covenant” duty is for trustees to look closely at risk and to request the carrying out funding ratio sensitivity analyses which forecast the effect of various key variable changes – both on the investment and the liability side. For example a trustee could request that a case in which more “pessimistic” longevity assumptions are made be actuarially quantified - and then challenge the sponsor as to what their reaction would be in such circumstances? This is what I would call “active monitoring” of the covenant as opposed to the passive monitoring which some trustees may see as sufficient.

In Mercer’s survey it was also revealed that in less than half of the schemes surveyed was there formal trustee performance evaluation. In my view such evaluation is desirable – so long as it focuses not just on knowledge but also on suitability. It would be wrong to start an evaluation exercise from the assumption that the only thing that trustees need in order to be effective is to be knowledgeable on all aspects of Pension Fund management. They don’t, so long as across the Board as a whole, and including external advisors, there is sufficient knowledge. Far more important for a trustee is the need for an enquiring mind and preparedness to challenge the conventional wisdoms - trustees must not be shy retiring violets! Evaluation needs to concentrate as much on personal qualities and attitude as on pensions specific knowledge.

Another subject on which Mercer reported was that of trustee remuneration. 37% of funds pay some or all of their non-professional trustees according to the survey. As an unashamedly amateur trustee I fully accept that external professional trustees on a Board should be paid but, in my opinion, other trustees should not be remunerated. I totally disagree with Mercer’s conclusion that nominal pay (or no pay) leads to trustees being perceived as amateurs “serving for altruistic reasons”. Indeed I would go further and say that at least some trustees on any Board should be amateurs - and I see absolutely nothing wrong with altruism! I am a trustee solely for altruistic reasons – I want somehow to protect/improve the lot of my Fund’s members. That’s what I am there for and I would prefer it that I and all my fellow trustees worked entirely voluntarily. If this sounds like a pro “Big Society” argument then so be it – perhaps it is! I agree that trustees should be of the “right calibre”, as Mercer put it, but do not think this means that it is a job like any other job that people do only because of the money they can earn - nor that this pay should be linked to some spurious measure of “performance” as Mercer also seem to want.

Finally Mercer’s survey reports on the composition of Boards and reveals that 48% of schemes apply some measure of selection for trustees. Ideally I think that Boards should be as diverse as practicable and that members should have a say in who represents them. Whilst I like the concept of the expert and objective “Independent trustee” I fundamentally object to the policy that some Boards seem to have introduced that “selection” should replace “election” for all trustees. A mix between “appointed/selected” on the one hand and “elected” on the other seems desirable and this is what I am used to. Justice has to be done and to be seen to be done and to have some Trustees elected by the various member groups will help ensure that this is the case.

Paddy Briggs is a Member Nominated Trustee Director of the Shell Contributory Pension Fund. He writes in a personal capacity and the views he expresses are his own.

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