One of the core responsibilities of a pensions investment consultant is to educate trustees about the unique risks that liability-targeting investors face, and to keep them informed about changes in the economic and regulatory environment. When done effectively this allows both trustees and consultants to see the fund’s current position from the same perspective, and acts as the foundation for subsequent decisions.
The process of educating trustees is an example of what I believe to be the key issue in pensions: communication between trustees and their consultants. Every year trustees make hundreds of decisions that affect their funds and its members, and each decision relies on communication between the trustees and their consultants. If that communication is unclear or ineffective, the quality of those decisions will suffer.
Once trustees understand their risks, they are in a position to agree on future goals. While explaining the complexities of a fund’s risk position as clearly as possible is one form of communication, helping the client to set a long-term goal for the fund requires another.
At this point it is important for the consultant to remember that communication is a two way process!
Consultants may have their own ideas about the best course of action, but as the fiduciaries of the fund it is essential that the trustees feel confident in the decisions they make. What is their long-term goal? How much risk are they willing to take? What type of risk? How do we measure the fund’s progress? It’s only through effective discussion with clients that the consultant can understand the client’s needs and preferences, and help them to answer these questions.
Having a framework to manage pension risks helps to uncover those preferences and allows those questions to be answered. The framework doesn’t make the decisions, rather it is a tool that allows clients to set their objectives and monitor progress towards those goals.
It is also important to note the role that governance structures play in this process. Without going into detail on different governance structures (you can find more on that here and here), an efficient governance structure provides a forum that facilitates this communication, and allows decisions to be made in a timely manner.
Figure1: Clear communication leads to collaborative decision-making
figure.pngClear communication and a trusted framework also help to build consensus rather than creating conflict and/or compromise. This is particularly important given the Pensions Regulator’s new DB funding code which emphasises a collaborative approach to managing pension fund risks.
With these conditions in place, pension funds are in a position to ACT in response to volatile equity markets, asset bubbles, QE, negative real yields, and all the extreme conditions that we have experienced in the last 15 years.
Please note that all opinions expressed in this blog are the author’s own and do not constitute financial legal or investment advice. Click here for full disclaimer.