All I want for Christmas is a submitted CMA compliance statement

Ghost of Christmas Past

Sixteen months have passed since the Competition and Markets Authority (CMA) published its Final Order introducing new duties for trustees of pension schemes. Under that Order, we are now approaching the first anniversary of Trustees being required to set strategic objectives for their investment consultants. What must Trustees be doing now? Should Trustees be reviewing those objectives?

Will we see Trustees setting objectives for all their advisers in future? And indeed for themselves, possibly to be scored by advisers, employers or the scheme members whose interests Trustees’ represent?

Ghost of Christmas Present: What must Trustees do by 7 January 2021?

Besides Q4 Trustee meetings and Christmas, one item on our to-do lists is agreeing the wording for the Trustees’ first compliance statement.

In a world where it often goes down to the wire in terms of achieving deadlines, it would be marvellous if the statements were submitted early, before Christmas. Given COVID-19 and another Brexit deadline, it would be one less worry in the New Year. Given the wording itself is prescribed by the CMA and is relatively straightforward, surely it’s not too much to ask for Christmas?

The Trustees’ compliance statement needs to cover Part 3 (where applicable) and Part 7 of the Order. Part 3 relates to the requirement for Trustees to run a competitive tendering process for appointing new, or retaining existing, fiduciary management appointments where these cover more than 20% of a scheme’s assets.

Under Part 7, Trustees are required to set strategic objectives for their investment consultants, otherwise they cannot continue to receive investment consultancy services from that provider. You may recall this led to a last-minute rush for many schemes last year – a bit like Christmas Eve shopping – to agree objectives so investment consultants could remain in place.

It is not a requirement to assess investment consultants against those objectives this year to satisfy Part 7, only to have agreed objectives in place. The relevant Department for Work and Pensions regulations have not yet been issued and, even once they are, they may not include an annual review requirement. However, we at Ross Trustees are taking the appropriate steps now to assure good governance and to remain one step ahead.

How Trustees could review their strategic objectives for investment consultants

Some Trustees are asking consultants to confirm whether each objective has been achieved, to rate themselves on their performance and to provide commentary or examples backing their assessment, which Trustees can then review. This perhaps feels like Santa asking children whether they have been good or bad this year.

Other Trustees are, at the same time and independently, scoring their investment consultant, using a scorecard framework: for example scoring 1-4 on each objective with corresponding criteria and thereby avoiding the “down the middle” approach. The advantage of this is an independent assessment by the Trustees, avoiding any anchoring to the answers given by consultants in “marking their own homework”.

Whichever approach is adopted, the value in the assessment is in the comparison, the challenge and outcomes that follow. It allows jointly agreed actions to be taken including changes to objectives or the scorecard framework. Furthermore this should develop and deepen the relationship between Trustees and investment consultants.

This year, with all the uncertainties of 2020 and its sleigh-ride markets, it feels timely to reflect upon how investment consultants have supported Trustees by proactively discussing and reviewing our investment strategies.

Ghost of Christmas Future: What might come next – Objectives for other advisers… and Trustees

Currently the requirement applies solely to investment advisers. It may only be a matter of time before it is extended to cover all advisers. Even if not mandatory, it feels like best practice to have agreed objectives in place.

It follows that, as Trustees have strategic objectives in place covering all areas of pension scheme operation, they should similarly have objectives in place for each adviser. If not for all, I believe at least for the scheme actuaries and covenant advisers in an integrated risk management way.

It might seem harsh to base assessment of those objectives only on the funding position and the strength of the employer covenant respectively, any more than basing the assessment of investment consultant objectives solely on scheme asset performance – although this is clearly extremely important. Objectives could be put in place similar to those in situ for investment consultants in the areas of strategy, monitoring, compliance, regulation, member engagement and communication.

Other advisers could have similar objectives in place for administration, auditors, governance and legal advisers, scheme secretaries and pensions managers. This could be done in a light touch way, such as a simple extension of Service Level Agreements or contracts.

Finally, and arguably most importantly for pension schemes, Trustees themselves should be open to being assessed against strategic objectives. Some Chairs have put this into best practice through periodic one to ones with individual Trustees. But who then assesses the Chair?

There are three current possibilities, assuming that the Pensions Regulator does not itself take on the role in future: advisers, employers and members.

Advisers could give an upward assessment – this may be seen to be a conflict as they are appointed by Trustees. Alternatively, employers and members, whose pensions schemes the Trustees govern and whom the Trustees represent respectively, might be better placed to assess. In this way Trustees would be open to challenge and development in the same way as advisers.

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