PENSIONS GOVERNANCE SURVEY 2013 - Mercer€¦ · making effective decisions. Three-quarters of all schemes now carry out some form of trustee board assessment. Forty-four percent

PENSIONS GOVERNANCE SURVEY 2013

DRAFT

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INTRODUCTIONIn this report on the results of our fourth Pensions Governance Survey, we present market data on issues of interest to all trustees and sponsors of UK pension schemes. Our survey was conducted in the summer of 2013 and received responses from 197 organisations.

The work of trustees continues to present fresh challenges, including the continued difficult economic conditions, the impact of quantitative easing, and the embracing of the new auto-enrolment requirements. In this complex environment, it is vital that trustees develop and maintain strong governance structures to ensure that they can fully discharge their duties. The Pensions Regulator has been active in promoting good governance and its focus has been on operational activities, including data audit requirements, as well as promulgating a particular focus on the governance of defined contribution (DC) schemes.

Our survey deals with a number of issues that Mercer consultants have been discussing with their clients, including:

•Trustee remuneration. •Trustee board characteristics.•Trustee board performance. • Investment governance.

The survey results are supplemented by Mercer’s own observations, points of view, and client experience, and we anticipate that the findings will provide robust and up-to-date information to enable schemes to evaluate their current approaches in light of market practice.

We are very grateful to the 197 participants in our survey for taking the time to complete it, together with the individuals who were interviewed and shared with us observations that have helped shape our point of view on pension scheme governance.

MERCER PENSIONS GOVERNANCE SURVEY 2013 1

KEY FINDINGS

TRUSTEE REMUNERATION

Of the organisations that responded to our survey, 67% of schemes now pay at least one trustee.

All schemes should now expect to pay the chair, except in cases in which the chair is an active member of the scheme or a senior employee/executive director of the sponsoring employer.

The fees for the chair increase with the size of the scheme. The median fee for the chair is £27,500.

Average levels of trustee remuneration have risen for independent trustees but not generally for other types of trustees.

TRUSTEE BOARD CHARACTERISTICS

The involvement of independent trustees has increased significantly across all but the smallest schemes with 48% of schemes having at least one independent trustee, either an individual or someone from a trustee company. Independent trustees now chair 34% of schemes.

Elections to secure member-nominated trustees are still common, despite the ever-increasing complexity of pensions and the consequent need to have suitably competent trustees.

Very few schemes have formal succession planning in place for all trustees, although there is a growing recognition that this should feature in order to ensure that experienced trustees are replaced by individuals with the right skills and expertise.

Over two-thirds of schemes have one or more subcommittees, reflecting increasing workloads and a desire to balance the time commitment for trustees with the need to have appropriate focus in key areas.

Sixty percent of schemes are supported by a team or individual that also serves the employer. Only 14% of schemes are supported by a team dedicated to the trustees only.

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of schemes pay atleast one trustee

67%of schemes require

no mandatory qualifications for

trustees

42%

of schemes have at least one

independent trustee

48%of respondents felt

confident in making short-term tactical

asset allocation decisions

Less than

1/2of schemes pay atleast one trustee



trustees

42%


independent trustee




Less than

1/2

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TRUSTEE BOARD PERFORMANCE

Only just over half of all schemes require trustees to have completed the Trustee Toolkit, a surprising and disappointing statistic given the Pensions Regulator’s focus on this and the pressing need to have competent trustees making effective decisions.

Three-quarters of all schemes now carry out some form of trustee board assessment.

Forty-four percent of schemes attract the required skills and competencies of the trustee board via the appointment of an independent trustee.

Levels of confidence in decision-making typically sit between 60% and 80%. Confidence is generally higher if there is an independent trustee or subcommittees, and in schemes with assets above £250 million. The main reason given for low confidence was a lack of skills and knowledge.

INVESTMENT GOVERNANCE

Decisions are made and implemented with more confidence and speed if there is an independent trustee and/or an investment subcommittee.

Confidence in decision-making does not always translate into efficiency in decision-making.

Schemes with assets below £250 million — particularly below £50 million — find many areas of investment decision-making challenging and tend to take longer to implement decisions.

Only 46% of respondents felt confident in making short-term tactical asset allocation decisions. Chairs of trustees tend to form a more pessimistic view, with 54% feeling they have missed market opportunities, compared with 19% for other trustees.

MERCER PENSIONS GOVERNANCE SURVEY 2013

of schemes pay atleast one trustee



trustees

42%


independent trustee




Less than

1/2of schemes pay atleast one trustee



trustees

42%


independent trustee




Less than

1/2

MERCER’S POINT OF VIEW

PROFESSIONALISING THE LAY TRUSTEE?

Three years ago we posed the question, “Is the lay-trustee model fit for purpose?” We believe this question is even more relevant today. In our interaction with a diverse range of trustee boards of all shapes and sizes, we are increasingly concerned by the difficulties that many trustees face as they grapple with the complexities of their role and their scheme.

The pressure on trustees continues to mount, due in part to legislation, regulation, and guidance, and also to the volatile economic environment, the typically weak funding position of many defined benefit (DB) schemes, and the frequent reduction in support — both financial and resourcing — from the sponsor (particularly those with no future accrual and for cases in which the scheme is seen as a legacy issue and irritant). In this scenario, it is small wonder that many trustees lack the necessary technical knowledge and behavioural skills (and confidence) to fulfil their role effectively. This is no reflection on their intellect, commitment, or motivation, but trustees are being required to step into a demanding role that is typically under-resourced and a significant step outside their scope of business activity. The trustee role can no longer be performed effectively “off the side of the desk”.

So what can be done? An obvious answer might be to appoint independent, professional trustees. So we find it surprising that only 48% of the boards in our survey have an independent trustee, although there has been an increase since our 2010 survey (except for the smallest schemes).

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This solution might seem the most straightforward way of increasing the knowledge and skills of the trustee board, provided such independent trustees are selected carefully to complement the knowledge and skills of the rest of the board. However, there are other ways to “professionalise” the trustee board, including:

•Reviewing the composition of the board, its committees, and the terms of reference for each committee.

•Setting clear strategic trustee objectives and monitoring the trustees’ performance against those objectives; using a forward-looking business plan and a strategic risk-management framework.

•Establishing succession plans for some or all trustees and refining the process for future selection of both company- and member- nominated trustees.

•Carrying out a skills and competency audit to identify gaps in the board’s overall capability.

•Evaluating the use of remuneration to attract, retain, and motivate the right candidates to the trustee role — and to acknowledge the role’s challenging and time-consuming nature.

•Recognising, in the sponsor’s talent-management process, the personal and professional development gained from working in a demanding boardroom environment.

WHO AND WHAT TO PAY?

Trustee boards need strong leadership through the chair, and we would argue that leadership requires appropriate recognition and reward commensurate with the professionalism required.

It is difficult to insist on the highest standards of commitment, competence, and performance when there is no remuneration or no fair remuneration. If people are paid fairly, they can expect to be held to account.


RESULTS IN DETAIL

WHO PARTICIPATED?

Participants in this year’s survey numbered 197, a significant increase from our previous survey in 2010. The schemes represent over 1,000 trustees and around 3.5 million members (actives, deferred pensioners, and pensioners).

Total pension assets of the participants are over £450 billion, which is almost 25% of total UK pension scheme assets.

There was strong participation from the entire range of sizes of UK pension schemes, from those with assets under £50 million to those whose assets exceed £10 billion. All types of schemes participated, with the vast majority being DB schemes (DB, CARE, or cash balance), of which 39% also had DC benefits. Less than 1% had DC only schemes.

Less than £50 million£50 million to £250 million£250 million to £500 million£500 million to £1 billion£1 billion to £10 billion More than £10 billion

16%

28%

13%

12%

25%

6%

FIGURE 1: PARTICIPANTS — SIZE OF ASSETS

Almost half the schemes participating had total memberships in excess of 5,000.

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TRUSTEE REMUNERATION

WHO TO PAY

Two-thirds of schemes now pay at least one trustee. Figure 2 below provides details on the percentage of schemes that have different types of trustees and pay them. For example, of the schemes that have deferred members, 19% pay this type of trustee.

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FIGURE 2: PERCENTAGE OF SCHEMES IN WHICH TRUSTEES ARE PAID (EXCLUDING CHAIR)

Independent trustees

Pensioners

Deferred members

Non-members connectedto sponsor

Actives

90%

47%

19%

7%

4%

Excluding trustees who are the chair, 47% of schemes pay pensioner trustees and 19% pay deferred members, while a small number pay non-members or actives.

•The percentage of deferred members who are paid by schemes has fallen by almost 50% since 2010, from 38% in 2010 to 19% in this survey.

•The pattern is broadly similar for schemes of all asset sizes, with the percentages being generally higher for the larger schemes.

•Exactly half of the schemes pay the chair of the trustee board. Those chairs who are not paid are mostly active members or a senior employee or executive director of the sponsoring employer.

• Thirty-eight percent of schemes pay the chair of the investment subcommittee.

•Less than a third of those schemes with other subcommittee schemes pay the chair of those subcommittees.

•Surprisingly, only 90% of schemes that have independent trustees say they pay these trustees.

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“ We undertook a lot of research on remuneration before finalising the revised basis.”

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WHAT TO PAY

Remuneration levels have increased for independent trustee companies and individuals since our 2010 survey. For other trustees, levels of remuneration are broadly unchanged (and have reduced in the upper quartile).

We have excluded active members from this table as the sample size was so small. Of the few schemes that do pay actives, payments range from under £1,000 to £30,000.

FIGURE 5: REMUNERATION FOR CHAIR — SIZE OF SCHEME ASSETS

More than £10 billion

£0 £50,000 £100,000 £150,000 £200,000

Lowest 25%26%–50%51%–75%76%–100%

£1 billion to £10 billion

£500 million to £1 billion

£250 million to £500 million


Less than £50 million

FIGURE 4: CHAIR REMUNERATION (TO NEAREST £100)Remuneration (chair)

Pensioner member

Independent trustee

Senior executive/director of sponsor

Lower quartile £15,000 £17,800 £8,000

Median £30,000 £25,000 £27,500

Upper quartile £44,500 £45,000 £30,000

FIGURE 3: TRUSTEE REMUNERATION (ExCLUDING CHAIR) (TO NEAREST £100) Remuneration (excl. chair)

Deferred scheme member

Pensioner member

Independent trustee

Non-member connected with sponsor

Lower quartile £4,800 £2,500 £18,800 £1,000

Median £6,300 £5,000 £27,000 £5,000

Upper quartile £8,000 £9,000 £40,000 £9,000

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Two-thirds of schemes now pay at least one of their trustees. This is a small increase from 2010 and seems to tie in with our experience that more trustees are now expecting to be paid, reflecting the increasingly complex nature and time-commitment of the role. However, the increase is also likely to reflect that more independent trustees are on boards and are paid.

Generally speaking, it appears that remuneration has remained constant with increases only for independent trustee companies and individuals. Nominal levels of pay persist for non-professionals (excluding chairs).

All schemes should now expect to pay the chair except in cases in which the chair is an active member or a senior executive/director of the sponsor. The pay for the chair tends to increase with scheme size, with pay significantly higher in schemes with more than £10 billion of assets.


TRUSTEE BOARD CHARACTERISTICS

WHO ARE THE TRUSTEES?

A typical trustee board comprises six trustees; nine would be the size of a typical larger trustee board.

FIGURE 6: PERCENTAGE OF SCHEMES WITH EACH TYPE OF TRUSTEE

Active membersof the scheme

Pensioner members

Non-members connectedto sponsor

Independent individuals

79%

68%

55%

34%

30%

20%

3%

Deferred members

Independent trusteecompanies

Other

Our survey showed that:

•Active members sit on 79% of trustee boards, pensioners on 68%, and deferred members on 30%.

•Non-members who are connected to the sponsoring employer or an associated company sit on 55% of boards.

•An independent individual sits on 34% of boards and 20% of boards include an independent trustee company (a total of 48% of participants have at least one independent trustee, either an individual or someone from a trustee company — an increase from 40% in our 2010 survey).

•Almost all of the largest schemes have at least one independent trustee or independent individual. Thirty percent of the smallest schemes (assets less than £50 million) have independents, rising to 45% for schemes with between £500 million and £1 billion of assets.

Compared to our 2010 survey, there is a significant increase in independents in all schemes, except in the very smallest schemes (assets less than £50 million).

“ We have taken steps to reduce the size of the board and to get all the trustees engaged.”

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11MERCER PENSIONS GOVERNANCE SURVEY 2013

An independent trustee chairs 34% of the schemes, with independent individuals being around three times more likely to be chair (26%) than an independent trustee company (8%). About 20% of independent trustee chairs are also chairs of one or more subcommittees.

Very few respondents that do not have independent trustees anticipate employing one within the next two years.

A third of the schemes that stated they have individual independent trustees indicate that those individuals are former directors or senior employees of the employer or an associated company, or a former advisor to the sponsor.

The survey results show that schemes are increasingly looking to an independent trustee company or individual to be trustees on their boards. The likely presence of independents on boards increases as the size of scheme increases.

Our experience is that the appointment process for independents can vary considerably between schemes. Appointment can follow a quick search in the market or, at the other end of the scale, there is often a very detailed tender process with formal procurement involvement. It is important that the sponsor and trustees undertake a process that will ensure that the right person for that board is chosen and this means both parties should set out their requirements clearly at the outset. A selection process involving three or four candidates enables an exploration of their different skills, experience, and leadership qualities. Independent trusteeship is an expanding marketplace and taking a robust approach to the selection process will ensure a good fit and beneficial outcomes.

As with the last survey, there is a small reduction in active members on boards, probably reflecting the reduction in schemes that are open to accrual and hence have active members.

The number of deferred members does not look to have changed significantly from the last survey and so it appears that boards are looking elsewhere to fill any gaps in their boards.

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HOW ARE THE TRUSTEES SELECTED?

FIGURE 7: COMPANY-APPOINTED TRUSTEES — PERCENTAGE OF SCHEMES BY SELECTION METHOD

Individuals with generalskills and experience

required

More than one of theoptions applies

Individuals with the skillsand experience to fill

specific gaps

Part of the duties ofspecific role-holder(s)

38%

22%

20%

8%

5%

3%

Individuals from specificareas of the organisation

are sought

Volunteers are requested

The majority of company-appointed trustees are selected based on their general or specific skills and experience.

FIGURE 8: MEMBER-NOMINATED TRUSTEES — PERCENTAGE OF SCHEMES BY SELECTION METHOD

Nomination andelection process

Nomination and electionprocess with pre-nomination

educationNomination and election

process with no pre-nominationeducation or selection

Selection process only

27%

20%

18%

13%

13%

9%

Other (inc. nominationand selection)

Nomination and electionprocess with pre-ballot

selection

A variety of methods are used in conjunction with a nomination process to choose the successful candidates, with some form of selection process still less common.

These findings were surprising as they show that a selection process (pre-screening of ballot selection or selection only) remains less common. We would like to see more boards increasing the information provided to candidates and introducing a form of objective selection process. While an election process is seen by many as the most democratic approach, with the complexities and commitment required from the trustee role today, introducing some form of selection process is more likely to get a better outcome in building more effective trustee boards.


FIGURE 10: TRUSTEE TERMS OF APPOINTMENT (IN YEARS)Trustee type Number of

schemesPercentage with >10- year terms

Average of <10 -year terms

Lower quartile

Median Upper quartile

Member-nominated trustees

176 1% 4.3 3 4 5

Employer- appointed trustees

138 16% 5.0 4 5 7

Independent trustees

70 10% 4.8 3 5 6

HOW DO TRUSTEES DEAL WITH SUCCESSION PLANNING?

FIGURE 9: ROLES WITH FORMAL SUCCESSION PLANS

Employer-appointed only

Employer-appointedand independent

Member-nominated only

Member- andemployer-appointed

34%

28%

20%

20%

18%

16%

Member-nominatedand independent

All roles

Independent only 6%

Only around a quarter of schemes have any form of succession planning. Of those that do, only 16% of respondents have a formal succession plan for all trustees. There is a greater degree of succession planning for employer-appointed trustees (including independents) than for member-nominated trustees.

Our view is that all boards should have a succession plan in place, especially for key individuals such as the chair. This should be discussed at least annually with the board and with the sponsor. Some trustees also extend succession planning discussions to cover their support teams, such as pension managers, secretaries to the trustees, and even their advisors.

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COMMITTEES

Sixty-eight percent of respondents say they use one or more subcommittees, of which just under half have either one or two subcommittees. Of the schemes that do use subcommittees, the table below shows how many are in place.

1 subcommittee

27%

2 subcommittees

21%

3 subcommittees

19%

4 subcommittees

13%

5 subcommittees

15%

6 subcommittees

2%

7 subcommittees

2%

8 subcommittees

1%

FIGURE 11: PERCENTAGE OF SCHEMES WITH ONE OR MORE SUBCOMMITTEES

Only 20% of the smallest schemes have subcommittees. There is then a big jump to 62% in schemes between £50 million and £250 million and this keeps increasing as the scheme size increases, reaching almost 100% for schemes with £1 billion or over.

FIGURE 12: SUBCOMMITTEES — PERCENTAGE OF SCHEMES WITH EACH TYPE

Investment

Governance(inc. risk management)

Discretionary decisions(e.g. death benefits)

Administration/operations

88%

45%

33%

32%

25%

23%

Funding

Audit

Communications 20%

9%

8%

3%

2%

Other

Defined contribution

Covenant

Remuneration

“ A recent governance review has led to a streamlining of the committee structure, which is more fit for purpose.”


By far the most common subcommittee is investment, and next most common is governance. We are surprised by the predominance of governance committees given that scheme governance is squarely the responsibility of the trustee board. Interestingly, relatively few schemes have a funding subcommittee, perhaps because the trustees wish to be involved as a whole group in such discussions, or because nobody feels able to volunteer for the role — it is seen as too difficult.

Almost a quarter of respondents (24%) with subcommittees have changed their subcommittee structure in the last 12 months, 39% in the last three years, and 28% more than three years ago. A further 9% have made no changes.

With the increased workload for trustees, it is not surprising that even some of the smallest schemes now have subcommittees in place. Subcommittees are delegates of the board and paying attention to the oversight and report-back process will mitigate the risk that the board rubber-stamps work done at subcommittee level. Setting the right balance of work between subcommittees and the board will also be helpful. It is important to respect the work done at subcommittee level and avoid duplication at board level; this requires timely and effective reporting, as well as productive and trusting relationships around the board table.

TIME COMMITMENT

Seventy-seven percent of schemes do not specify the time commitment required of trustees.

Of those that do specify:

•Seventy-two percent specify the time commitment in terms of the number of meetings. Four meetings per year is by far the most common, and six meetings per year would be upper quartile.

•Around one-fifth (21%) specify the time commitment in terms of number of days: 57% of respondents work more than 20 days a year and less than 10% said they devoted fewer than 10 days a year to the role.

RESOURCES AVAILABLE

Sixty percent of schemes were supported by a team or individual that also served the employer. Only 14% of schemes were supported by a team dedicated to the trustees only.

TRUSTEE BOARD PERFORMANCE

HOW DO TRUSTEES EVALUATE THEIR OWN PERFORMANCE?

We asked whether boards undertook assessments of the chair, the board collectively, and trustees individually.

As in 2010, self-assessment by the trustees is the most common method used.

Since 2010, there has been an increase in the number of schemes undertaking assessment and this increase seems to be due to a rise in schemes performing external assessments.

HOW DO TRUSTEES ENSURE THEY HAVE THE APPROPRIATE SKILLS AND ExPERIENCE?

Surprisingly, only 56% of schemes require trustees to complete the Pensions Regulator’s Trustee Toolkit, while 42% have no mandatory qualifications. Use of independent trustees is the most common method of ensuring the trustee board has appropriate skills and experience (in 44% of schemes).

FIGURE 14: ENSURING TRUSTEE BOARD ATTRACTS THOSE WITH APPROPRIATE SKILLS AND EXPERTISE

Appointed independenttrustee(s)

Selection process formember-nominated trustees

Relied on the election/nomination process

Non-trustees siton committees

44%

38%

33%

27%

27%

23%

Screen employernominations

Communicate benefitsof the role

Non-trustees sit on board 23%

11%

7%

Other

Trustee role part of sponsor’stalent management

FIGURE 13: PERFORMANCE ASSESSMENT METHODSTrustee board Chair of trustees Other trustees

Self-assessment 67% 56% 49%

External assessment 13% 14% 8%

Not assessed 26% 35% 45%

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“ We perform self-assessments, including involving our advisors. It would be good to understand the value of external assessment.”


Various methods are used to help retain the appropriate expertise on trustee boards:

•The most common (for 54% of schemes) method is to view the trustee role as a development opportunity.

•Thirty-two percent of schemes use remuneration as a retention tool.

•A quarter (25%) of schemes, for which the trustee is employed by the sponsoring employer, use feedback on the trustee role in the performance appraisal.

The increase in schemes undertaking performance assessments is encouraging. Self- assessment is usually a relatively simple and quick process that brings helpful reflection on a range of board activities. In our experience, engaging the board in an open and constructive discussion on the results of an assessment is well-received by trustees and often leads to improved effectiveness.

Performance assessments using external facilitation are becoming more common. We draw a parallel between the remit of a trustee board and, for example, a FTSE 350 corporate board, which is now required under the revised UK Corporate Governance Code to have an externally facilitated evaluation of the board at least every three years.

Undertaking an external assessment is a process that trustee boards should consider carefully to ensure success. External evaluation could include one or more of:

•Board/committee meeting observation.

•Individual interviews with trustees and advisors.

•Reviews of scheme documentation.

•Review of specific areas in which there have been recent issues or challenges.

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HOW CONFIDENT ARE TRUSTEES IN MAKING DECISIONS?

FIGURE 15: TRUSTEE BOARD CONFIDENCE IN DECISION-MAKING — PERCENTAGE OF SCHEMES

Consulting with sponsoron investments

Oversight of administrationprovision

Investment managermonitoring

Assessing strength ofsponsor’s covenant

85%

80%

76%

74%

70%

69%

Review of advisorperformance

Funding assumptions

E�ective membercommunication strategy 69%

68%

66%

Design and implementationof DC fund structureSelecting/replacing

investment managers

64%

63%

61%

60%

46%

Negotiation ofvaluation outcomes

Managing risk

Investment strategy

Choosing asset classes

Short-term tacticalinvestment decisions

See also Section 8: Investment Governance for more detailed commentary on investment decision-making.

There is a low level of confidence in making decisions, especially with regard to the financial management of the scheme (funding, investment, and sponsor covenant). Some interesting observations include:

•More confidence if independent trustees are appointed.

•More confidence if there are subcommittees.

•Less confidence if the board does not assess its performance.

•Less confidence among schemes with assets below £250 million, but even the largest schemes show a surprisingly low level of confidence.


FIGURE 16: REASONS FOR LACK OF CONFIDENCE — PERCENTAGE OF SCHEMES

Skills and knowledge gaps

Lack of time devotedto discussion

Lack of clarity of sponsor’sdecision-making processes

Lack of resources to providereliable information

66%

23%

19%

18%

12%

12%

Lack of a defineddecision-making process

Complex issues

Lack of board cohesion 4%

By far the most common reason for lack of confidence is gaps in the board’s skills and knowledge. This suggests a general need for increased training and development. We noted earlier in this report the lack of a requirement to complete the Pensions Regulator’s Trustee Toolkit, which provides the necessary basic grounding. The role of trustee requires an ever-increasing amount of specialist knowledge, such as assessing the sponsor covenant and understanding alternative asset classes, and this may partially account for the lack of confidence.

We wonder if some boards may be relying too much on advisors to make decisions, without making themselves sufficiently familiar with the issues or challenging the advice given.

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WHAT QUALITIES DO TRUSTEES LOOK FOR IN THEIR ADVISORS?

FIGURE 17: QUALITIES LOOKED FOR IN ADVISORS

Providing you withhigh-quality work

Being a trusted advisor

Being responsive to you

Providing value for money

97%

90%

88%

88%

86%

86%

Working with you as a team

Being proactive

Knowing you 71%

62%

58%

Being innovative

Resolving your problems

45%

26%

Managing your project(s)

Able to influence/persuadekey stakeholders

The key attributes trustees look for from their advisors are consistent with the feedback we receive from our own client reviews. Being able to influence or persuade key stakeholders is given relatively low prominence, which we find surprising.

HOW OFTEN DO TRUSTEES REVIEW THEIR ADVISORS?

Informal reviews of both scheme actuary and investment consultant are quite prevalent; formal reviews are less common. In our opinion, the approach adopted should depend on specific circumstances and also reflect trustees’ approach to the governance process.

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Years since last informal review Investment consultant

Scheme actuary

Less than 1 43% 34%

Between 1 and 3 39% 33%


More than 7 2% 7%

Don’t know/no review 8% 14%

Years since last formal review Investment consultant

Scheme actuary

Less than 1 17% 8%



More than 7 13% 14%

Don’t know/no review 24% 41%

FIGURE 18: PERIOD SINCE LAST REVIEW OF ADVISORS


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INVESTMENT GOVERNANCE

HOW CONFIDENT DO TRUSTEE BOARDS FEEL IN MAKING INVESTMENT DECISIONS?

FIGURE 19: TRUSTEE CONFIDENCE IN DECISION-MAKING — PERCENTAGE OF SCHEMES


Selecting/replacinginvestment managers

Managing risk

Investment strategy

76%

66%

63%

61%

60%

46%



As already indicated (see page 18), trustees are generally more confident in their investment decision-making abilities in the more traditional areas of trustee responsibilities, such as investment manager monitoring and selecting and replacing investment managers. Short-term tactical investment decision-making is an area in which trustees feel significantly less confident in their abilities.

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“ Our investment manager has delegated powers to act within the agreed strategy.”


HOW DO DIFFERENT GOVERNANCE STRUCTURES IMPACT CONFIDENCE IN INVESTMENT DECISIONS?

FIGURE 20: IMPACT OF ENHANCED GOVERNANCE ON INVESTMENT DECISION-MAKING

Investment strategy

100%0% 20% 40% 60% 80%



Managing risk


Selecting/replacinginvestment managers

Without investment subcommittee or independent trustees Investment subcommittee Independent trustee

The introduction of an independent trustee and/or investment subcommittee increases trustees’ confidence in their decision-making in the traditional areas of trustee investment responsibilities (including strategy, asset allocation, and managers). However, when decisions relate to short-term tactical investment issues, those with the added governance support, such as an investment subcommittee or independent trustees, recognise the complexities involved and are therefore less confident. Investment subcommittees and independent trustees have the greatest positive impact on confidence in the areas relating to investment management decisions.

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HOW DO DIFFERENT GOVERNANCE STRUCTURES IMPACT THE TIME IT TAKES TO MAKE AN INVESTMENT DECISION?

Having an enhanced governance structure with either an independent trustee or investment subcommittee (or both), has a reasonably positive impact on the speed with which investment manager selection decisions are made. Only 44% of respondents that have neither an independent trustee nor an investment committee were able to make those decisions in less than three months. When an independent trustee or investment committee is introduced, the proportion of respondents meeting that time frame increases to 60% and 56% respectively.

Similarly, in relation to introducing new asset classes, the inclusion of an independent trustee and/or investment subcommittee shortens the time taken to implement, with the number of respondents taking more than six months falling from 17% to 8% and 12%, respectively.

The most common reason given by respondents for delays in investment decision-making, regardless of whether they use an independent trustee or investment committee, was not enough time for meetings.

FIGURE 21: LESS THAN THREE MONTHS TO MAKE A MANAGER SELECTION DECISION — PERCENTAGE OF SCHEMES

All respondents

Independent trustee

Investment subcommittee

Without independent trusteeor investment subcommittee

53%

60%

56%

44%

FIGURE 22: LONGER THAN SIX MONTHS TO INTRODUCE A NEW ASSET CLASS — PERCENTAGE OF SCHEMES

All respondents

Independent trustee

Investment subcommittee

Without independent trusteeor investment subcommittee

13%

8%

12%

17%

The ability to make decisions quickly has a direct and sometimes dramatic impact on the ability of the scheme to respond to changes in the economic environment and consequent changes in markets. It is for this reason that it is so important for trustees to have an effective and efficient decision-making structure.


HOW DO CONFIDENCE AND IMPLEMENTATION OF DECISIONS VARY BY SCHEME SIZE?

Schemes under £250 million, particularly those greater than £50 million, find many areas of investment decision-making challenging. The very largest schemes, which typically have more in-house resources and potentially greater access to external support, are, unsurprisingly, more confident in making these decisions.

FIGURE 23: SETTING INVESTMENT STRATEGY CHALLENGING

18%

39%

11%

9%

18%

4%







FIGURE 24: SELECTING/REPLACING INVESTMENT MANAGERS CHALLENGING

21%

33%

15%

10%

15%

7%







FIGURE 25: INTRODUCTION OF A NEW ASSET CLASS TAKES LESS THAN THREE MONTHS

14%

24%

10%

11%

35%

6%







FIGURE 26: CHANGING AN INVESTMENT MANAGER TAKES LONGER THAN THREE MONTHS

17%

40%

13%

13%

13%

3%







IMPLEMENTATION OF INVESTMENT DECISIONS — BY ASSET SIZE

26

The greater confidence of larger schemes seems to translate into more efficient execution. For example, schemes with assets between £1 billion and £10 billion seem to make decisions on new asset classes faster than smaller schemes (Figure 25). Likewise, it appears that it takes smaller schemes longer to implement changes in investment managers than schemes with assets greater than £250 million (Figure 26).

Approximately half of the largest schemes (with assets over £10 billion) have considered outsourcing investment decisions in the past 12 months, with another third of these schemes saying they will look at delegating investment decisions in the future.

The analysis suggests that smaller schemes might be struggling with investment governance, both in terms of confidence of decision-making and implementation of those decisions. However, larger schemes are also recognising the constraints in their investment governance.

MAKING DECISIONS ON SHORTER-TERM MARKET OPPORTUNITIES

As highlighted in Figure 19, only 46% of respondents that have faced the issue of making decisions on shorter-term tactical investment decisions feel confident doing so. More than half of all respondents feel that responding to market opportunities is not a trustee responsibility and of those who believe it is their responsibility, only 20% believe they fulfil this responsibility very well. Larger schemes (those greater than £500 million) have greater confidence in their ability to fulfil these responsibilities.

WELL-STRUCTURED TO TAKE ADVANTAGE OF MARKET CONDITIONS — BY ASSET SIZE

FIGURE 27: TAKING ADVANTAGE OF MARKET CONDITIONS

18%

4%

10%

40%

29%

40%








An interesting observation from the survey results is that those respondents that act as chair of trustees for their pension schemes exhibited significantly different views on how well their schemes responded to market opportunities compared to those respondents who act as trustees.

Just over two-thirds of chairs of trustees and trustees believe their investment governance structure enables them to take reasonable advantage of investment market opportunities. However, a quarter of chairs believe their structure serves them poorly. In contrast, nearly a quarter of trustees believe their structure serves them “very well”. More than half of chairs believe they have missed investment opportunities due to the time taken to make decisions, compared with only 19% of trustees.

Investment decisions are increasingly complex and it is difficult to operate an adequate governance structure without an investment subcommittee. Specialist training is vital, as is finding sufficient time to devote to decisions and their efficient implementation. This is a particular challenge for smaller schemes. However, the benefits of good investment governance are substantial, in terms of added value to investment returns and the consequential impact on sponsor funding.

25%

8%

68%

69%

7%

23%

12%

61%

27%

FIGURE 28: TRUSTEE BOARD STRUCTURE FACILITATES THE PROCESS

Poorly

Reasonably well

Very well

Chair of trusteesTrusteeTrusteeOther job titles

71%

29%

FIGURE 29: MISSED OPPORTUNITIES DUE TO TIME TAKEN

Chair of trustees

Trustee

Other job titles

46%

54%

81%

19%

NoYes

TAKING ADVANTAGE OF MARKET CONDITIONS

28

TO FIND OUT MOREIf you have any questions about this survey or would like to discuss other aspects of trustee governance, please contact your usual Mercer consultant or:

Clare Owen [email protected] +44 20 7178 5260

Dan Melley [email protected] +44 20 7178 3779

Note: The information contained within this document may not be copied or reproduced in any form without the prior permission of Mercer Limited.

31MERCER PENSIONS GOVERNANCE SURVEY 2013 29

For further information, please contact your local Mercer office or visit our website at:www.mercer.com

Argentina

Australia

Austria

Belgium

Brazil

Canada

Chile

China

Colombia

Czech Republic

Denmark

Finland

France

Germany

Hong Kong

India

Indonesia

Ireland

Italy

Japan

Malaysia

Mexico

Netherlands

New Zealand

Norway

Peru

Philippines

Poland

Portugal

Saudi Arabia

Singapore

South Africa

South Korea

Spain

Sweden

Switzerland

Taiwan

Thailand

Turkey

United Arab Emirates

United Kingdom

United States

Venezuela

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PENSIONS GOVERNANCE SURVEY 2013 - Mercer€¦ · making effective decisions. Three-quarters of all schemes now carry out some form of trustee board assessment. Forty-four percent