Made to measure

So, let’s imagine that it’s appraisal time at work. There’s a grading system from 1 to 5, where the higher the number the better you’ve done. You look back at your objectives for the year – the ones you wrote. They were a bit vague (deliberately) so it’s difficult to measure them. You get to choose your own grade and decide that 4 seems pretty fair. Admittedly, it’s not been a stellar year, but you’ve done OK. Your manager seems fine with this – in all honesty, he’s not sure what you actually do.

While this would be considered unacceptable in most businesses, it’s often the shape of the existing relationship between many trustees and their investment consultants. Here we have a very important and very well-paid role, which because of its complex nature is difficult for non-specialists to understand. Most trustees simply do not have the necessary skills or time to properly scrutinise their investment consultant. This can often lead to poor performance going under the radar.

Not for much longer. On 10 June 2019, following an extensive investigation and consultation, the Competition and Markets Authority (CMA) announced new rules and requirements affecting how pension scheme trustees appoint and interact with their investment consultants.

Among the new rules is a requirement for trustees to set objectives for their investment consultants. The objectives will need to be in place from 10 December 2019 and will mean investment consultants providing a ‘clear definition of the outcome expected to be delivered and the timescale over which it will be delivered’.

Granted, many trustees will already challenge, review and change investment consultants if it becomes obvious that their performance is not good enough. For larger schemes there will probably be processes in place similar to the CMA requirements. For smaller schemes, such processes are less common and so this new tighter structure will help improve governance by ensuring that there are clearly defined and measurable objectives in place for investment consultants.

Nevertheless, I see two obvious problems with the new requirements:

  • Firstly, investment consultants are, and will continue to be, heavily involved in the process of drafting the investment objectives. So, they may continue to simply ‘mark their own homework’ and award themselves gold stars. Professional trustees can help manage this. They can use their wider industry experience and exposure. They often act for several schemes so will see a variety of investment objectives being used for different schemes. This means they can identify a “universe of objectives” and then apply those that are relevant to a particular situation ensuring their relevance.
  • Secondly, the objectives set by investment consultants can often be vague, for example ‘to support the trustee’s investment strategy decisions’. Statement such as this are weak and just a basic minimum expectation. As trustees get better at drafting objectives these should become stronger and more measurable, with outcomes that are specific, appropriate and defined. Armed with these properly defined objectives, trustees can identify what exactly is good advice and challenge their investment consultants when standards drop below their expectations. 

Overall, this is a welcome move by the regulators. Investment consultants are pivotal in the successful running of a pension scheme and it is important that trustees can effectively measure their performance. Setting made to measure objectives will also allow trustees to get a deeper understanding of what success looks like and encourage them to take appropriate action when there is a period of sustained slippage. Equally, those investment consultants that perform well will be able to evidence this to their trustees.