We asked our expert panel for their views on getting the right people and defining the right processes on a trustee board
Are people or processes the bedrock of good governance?
DW - I thought there was some interesting material in the PLSA’s recent Good Governance: how to get there, discussion paper. Some of their conclusions around the emphasis on people are a good idea. But they downplayed the importance of outcome. If you’re a pension scheme member, that is what you’re most concerned with. I also felt it emphasised technical skills which are involved in the role of governance, but were a bit too light on balance of power issues.
If you look, for example, at the DWP Select Committee report on BHS, Frank Field distinguishes three groups: the employer, the advisers and the scheme members. I thought the PLSA’s paper underplayed the significance of making sure that all three sides of that triangle are represented in the discussion. And flowing from that I thought they underplayed issues like conflict of interest.
CG - I agree - people and processes are equally important. I think you need to have good people with the right skills, and then ensure that you follow good process and get the outcomes for scheme members. For me, diversity of skills and demographics is important. Professional trustees specifically often come from a narrow demographic in terms of their professional backgrounds. They bring credible wisdom to the table, but we must also look out for herd mentality. You need a diverse set of people including a good number of lay trustees as well - it shouldn’t always be about professional trustees. Lay trustees must also ask common sense questions of professional trustees and consultants. In terms of other types of diversity, it becomes more difficult. Younger people, for example don’t necessarily have a vested interest because they may not be members of the DB schemes.
NM - Processes keep you out of trouble, if they’re done correctly – we can’t underplay their importance. Many schemes only have a board of three or four people, or find it very difficult to recruit them. Plus, there’s a growing trend towards sole trusteeship. In those cases, processes are vital. I fully agree that it is imperative that governance doesn’t end with box-ticking, because the key of a good trustee, particularly of a chair, is judgement. That can’t be measured by an exam and that’s where the people aspect really comes in. But processes provide the broad boundaries of the framework.GP You need balance and in a number of areas lay trustees can add very valuable oversight. You have to be aware of the skills that they bring to the group. If you’re dealing with highly complex and technical investment issues, some lay trustees can’t really assimilate that information or absorb it thoroughly enough to add to the debate. Picking people who can do that or leaving it to people with that background to run with more technical issues is very important. Structuring of trustee boards and subcommittees becomes very important in that context.
If independent trustees are appointed by the sponsor, does that have an impact on their relationship with MNTs?
DW - We do an annual survey of members and one of the things that came out was that the independent trustees by-and-large are appointed by the sponsoring employer. If you add up the company nominated trustees and those who are paid for by the employer it comes to four-fifths of the total. So, I think there is a problem with the definition of exactly what constitutes independent.
GP – It’s important to take a step back and look at the employer’s role in the pension scheme. They want the scheme to run effectively because they don’t want to have more financial shocks and to put yet more money into the pension scheme. It’s not a question of employer versus scheme and the idea that the employer is at loggerheads with the scheme is very unhelpful. They would like the puzzle solved and the pension scheme to be no longer a problem. It’s important that the emphasis is on having the right people around the table and working cooperatively. Therefore, getting the appropriate representatives whether from the company from a professional trustee point of view, or from the members as member nominated trustees, is of utmost importance to the employer.
CG – it’s also important that either side knows what they are looking for in terms of finding the right skills and experience. Independent trustees are going to have their own broad range of experience and have worked in different industries. They bring that background and diversity to the trustee boards that they work with.
NM - We’ve never had an issue with the relationship. MNTs have an essential role and it works extremely well so we have no issue with it.
GP - We are sometimes appointed on an interim basis – perhaps for a transaction or similar. There’s a general feeling that they need an independent to carry out a specific bit of business and to be seen to have that independence. Then very quickly, the existing trustees will say: ‘This level of help, knowledge and guidance within our trustee board is something we find really, really useful and we’re suddenly a lot more confident in what we’re doing and how we can take our decisions.’
NM - Because the appointment is often made by the sponsor, sometimes there’s a concern that is the independent or the professional trustee is a Trojan horse for the sponsor. And as soon as they realise the responsibilities are the same as those of the lay trustees that goes away.
How can having an independent trustee on a trustee board affect the relationship with advisers and consultants?
CG - All trustees need to be able to build a working relationship with advisers. Lay trustees often need support and training across a range of areas. Investment managers can help them address gaps in their knowledge.
NM - It’s the role of trustees - often led by professional trustees because many lay trustees don’t have the investment experience - to probe and to test not just the consultants but also the managers.
GP - I’ve encountered occasions where we’ve been appointed because people haven’t been happy with how the scheme has been running, and it can be as simple as one adviser doesn’t work very well with a particular group of people. Just a change of that one person can alter the atmosphere within the board and decision-making can ease up. But, again, it’s having someone with the experience to come in and effectively say ‘It’s not actually the trustees, there’s another problem elsewhere and if we free this up it’s going to run a lot better.’
To Read the full report click here