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Pilot’s guide

05 February 2015

Expert advisers are essential for trustees to ensure they deliver pension schemes safely to their desired destination.

A pension fund trustee’s lot is a broad and, at times, demanding one. There’s the business of collecting contributions, or selecting and monitoring investment funds and, in some cases, investing a scheme’s assets. Trustees must ensure members receive annual statements and communicate with them on matters such as automatic enrolment. And, while they administer these and other duties, trustees must act prudently, responsibly, honestly and in the best interest of members.

It is fair to say the tasks of trusteeship are exacting. And, as with any role that has a wide-ranging remit, one of the main daily challenges is to keep abreast of the minutiae. It might be the finer detail of an investing strategy or how assets and liabilities behave that could seem taxing (and, for sure, investing strategies for defined benefit schemes are hard to grasp, even for the most technically-minded).

But, as Sebastian Schulze of investment consultants Redington observes, some complexity is an inescapable feature of setting and monitoring an investment strategy for a pension fund. After all, there is an inherent degree of complexity in the process of managing a pension fund. Interest rates, inflation, longevity, cash contributions, and equity, commodity and corporate bond returns all determine the performance of a fund.

Simplify complexities

This does not mean that solutions need to be so complex that trustees cannot be expected to understand them. Schulze points out that, as in any other walk of life, the important thing is to strike the right balance. “Any complexity introduced should provide value,” he says. “In other words, strategies should be as complex as necessary but as simple as possible.”

But quality guidance is paramount for a board of trustees, and specialist advisers need to be appointed to help select an appropriate investment strategy. Part of the adviser’s role is to explain why the proposed degree of complexity is required and how it will help the pension fund get to where it wants to be. “Once the right level of complexity has been found, it is usually quite easy to explain why it is needed and how it fits together with everything else,” he adds.

A trustee’s knowledge of a pension fund can be usefully compared with that of a pilot’s of an aircraft. “A pilot knows how the different key systems of the aircraft work together – such as the engines, navigation and electronics – to keep the plane in the air and allow its safe passage,” he explains. “Pension trustees are in a very similar position. Trustees cannot be expected to know every single technical detail, for example how each asset in a pension fund portfolio is valued, or how the actuary derives assumptions on life expectancy. But that doesn’t mean that investment solutions need to be so complex that trustees cannot possibly be expected to understand them.”

Flying advice

In the case of defined contribution schemes, trustees need to choose investment funds for the default strategy and further options for members who wish to set their own investment strategy. It’s also important to ensure the risk profile of funds meets the needs of the membership. For both defined contribution and defined benefit schemes, trustees should use advisers who are appropriately qualified to give advice on pension scheme investing.

In order to act prudently, responsibly and honestly, a board of trustees should always take professional advice on any matters which they might not fully understand and on technical issues which may affect the scheme. “Only when these are explained effectively can the trustees make the right decisions for the scheme and ensure members reach their intended destinations safely,” concludes Schulze.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up.  You may get back less than you invested.


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