Have you thought about what your consultants do for you?

Estimated reading time: 5 minutes

The Pensions Regulator recently issued some draft guidance to help pension trustees set objectives for their investment consultancy provider. Every pension trustee should read this, as from 10 December this year, there will be a prohibition on trustees taking investment advice, unless they have set their advisers suitable objectives. The Pensions Regulator is expected to be given the legal power to enforce this new requirement and punish trustees (and potentially advisers) who aren’t in compliance. The Department for Work and Pensions (DWP) is currently consulting on the legislation to make this happen.

Agreeing objectives sounds like a good thing…Right?

We think having agreed and well-documented objectives is indeed a good thing. It will make sure all parties are on the same page about what’s expected from the investment advisers and will provide a framework for assessing whether they’re doing a good job or not.

Many of our clients have already set us good objectives, but over the coming weeks we’ll be working with all our pension trustee clients to help them either set formal objectives for the first time, or to check that their existing objectives are compliant with the new regime. In a lot of cases, complying with the new regulations may be as simple as documenting an already well-functioning relationship and pre-existing objectives. For trustee boards that have never set objectives for their investment consultants, now is the time to have a discussion about what they want their consultants to do.

So what’s the downside?

Asking your investment consultant to help you with this, is a bit like asking a student if they’d like to help the examiners set the exam – you shouldn’t be surprised if it’s got lots of easy questions in it. Trustees need to be aware that their consultants might argue for objectives that they will have no difficulty in meeting, but might not be in line with what the pension scheme really needs. However, clearly you need to discuss these objectives with your consultants – you can’t set them in a vacuum. Consultants need to rise above this conflict and give their clients the right help in this area. The process of setting objectives should result in a more collaborative and efficient relationship between trustees and consultants. Some trustees may wish to seek help from an independent third party; we can help here.

When setting objectives be careful what you wish for. It’s an old adage that what gets measured gets managed, so be aware of unintended consequences. For example, if you tell your consultants you’re going to measure them on their proactivity you may find you then get bombarded with every single new investment idea, whether they’re relevant to your situation or not. This will help the consultant ‘prove’ that they’re being proactive, however it might not actually help you to pay your members’ pensions.

The definition of investment consultancy provider probably isn’t quite what you think it is. For example, it looks like the DWP’s regulations will cover a scheme actuary providing high-level commentary on the investment strategy. So it might be a good idea to have a chat with your actuary, and see if you can agree some objectives for them as well. Otherwise, you might find your actuary has to start saying “I can’t comment on that”, when you ask for a view on an investment issue. There’s a specific carve-out for legal advisers, so don’t worry about setting these objectives for your lawyers.

What next?

We will be helping all our clients to set us objectives, but we will also be pointing out our inherent conflict of interest. We will act independently, as we always do, giving the advice that we think is in our clients’ best long-term interests.

Our view is that for these objectives to be helpful, they need to be aligned with what pension trustees are actually trying to achieve. We’d expect to see a focus on high-level strategic objectives like generating a required level of return, achieving a target level of funding, and keeping risk within a specified limit. We think this is the right way to set objectives, as then the investment adviser can make sure that all their advice is focussed around the issues that will really make a difference.

You’ll need to review the performance of your investment advisers, including your actuary where they’re covered by the new regulations, at least every twelve months. However, when you’re measuring your investment adviser against their objectives, you will need to remember that success in some areas will be outside their control. The trustees are the ones actually making the decisions – not the adviser. So unless you always do everything your investment adviser says (and promptly), it’s probably unfair to measure their success against the actual investment outcome. And even then, you’ll need to remember that poor market conditions will usually lead to poor outcomes, regardless of the quality of the advice, and that sometimes bad advice can lead to better outcomes than good advice.