How Good Governance makes you an investment guru

October 30, 2015 Categories: Governance & Regulation


This is a blog by a guest author which was first published on Mallowstreet, a specialist site for pension professionals, on 7th October 2015 following the Russell Mallowstreet University dinner on Governance.

“How Good Governance makes you an investment guru….. or how bad Governance will only ever let you get it right by sheer fluke.

If ever there was a debate in a pension’s industry supper to rival Question Time, last night was probably a contender for the title.

The latest Mallowstreet University Dinner was hosted superbly by Russell investments who gave a presentation on Governance – What it is, how it works and the implications it has for your pension fund.

If you ever wondered what makes the pensions industry so fascinating then yesterday’s supper might have provided some insight.

Sital Cheema and Nick Spencer from Russell gave a beautifully crafted presentation based on the findings of a survey they had undertaken amongst a large number of UK occupational schemes.

We looked at the costs associated with poor governance and how this affects pension schemes of various sizes. After this we looked at the challenges facing trustees and investment committees – interestingly 98% of pension funds over £100mln in size have de-risked compared to 50% of schemes below £100 mln.

We then covered how the speed of decision making can have an effect on the cost of investing – not surprisingly crossing the bid-offer spread more often ended up costing a lot more than less frequent visits.

Perhaps unsurprisingly, the survey illustrated the fact that smaller schemes bear a correspondingly higher governance cost relative to their asset base and that larger schemes were able to defray third party costs better than smaller schemes.

Approximately half way through the presentation, however, things got rather interesting. One slide focused on the perceptions of FDs and noted that FDs from large scheme sponsors spent over 20% of their time prioritising their DB scheme. In fact 52% of all large scheme FDs spend more than 20% of their time on the DB scheme compared to 53% of small scheme DBs spending less than 5% of their time on the DB scheme. A lot more research is needed here, particularly in respect of how the deficit of each of these schemes varies in line with the respective sponsor’s assets ability to fund it, but the point wasn’t lost on the assembled company.

One of the most interesting slides illustrated how Gold standard schemes pay their trustees more than Bronze standard schemes. In fact the lowest paying Gold standard scheme pays more than the highest Bronze standard scheme with Silver standard schemes filling the narrow gap between the two. Quite how to distinguish between cause and effect here is a bit of a handful, but as a trustee I know which way I’d present this slide in any remuneration negotiations.

The last part of the presentation was taken up by which strategic decisions were taken by trustee boards. The big surprise here was that 100% of boards take the big strategic asset allocation decisions yet only 37% take tactical ones.

The above presentation took care of the first 20 minutes of the supper and we spent the next two hours discussing and debating the subtler nuances of Governance – how to define it and, perhaps more importantly, how to implement it in a timely fashion. I wrote down my own thoughts on what it is and how it works but I’d appreciate any thoughts from the other guests who attended last night’s supper.

Another significant point was debated at some length, namely how to select the trustees who will give a scheme good governance. A few common factors were noted. Interestingly, subject matter expertise was not amongst these. It is undoubtedly an important resource for trustees to be able to call upon, but the most important considerations were to look for someone who is engaged, who possesses an enquiring mind and who has the moral courage to be able to call a halt in a decision making process they either don’t understand, or are unhappy with.”

Russell are in the process of writing the Russell Pension Governance Index which will be published later in the year.

Any opinions expressed are solely those of an external author and are not necessarily the opinions of Russell Investments. Russell Investments take no responsibility for the accuracy or completeness of information.

Simon McClean, Commerzbank UK Pension Fund


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