Trustee consultant interactions and relationships are complex and often scheme specific, Aon has found.

In its third paper ’Selecting Fund Managers and Consultants - What Do Trustees Look For?’, with Leeds University Business School (LUBS), Aon looked at the relationships between trustees and their fund managers and investment consultants and the interactions between these in the pension scheme investment process.

The research, led by LUBS associate professor in accounting and finance Dr. Iain Clacher, found that it is not possible to generalise what all scheme trustees look for in investment consultants and that variations can depend upon scheme size.

Small schemes were found to focus more on past performance, costs and fees, fund size, firm size and volatility. However, large schemes place more emphasis on investment philosophy, decision-making and risk management.

A total of 64 per cent of trustees said they review their investment strategy annually and 57 per cent review their investment managers annually.

Generally, trustees were found to focus on risk-adjusted performance and most retain a longer-term view. Overall, they all noted that they look to consultants for clear advice, understanding of the scheme and its aims and risk management advice.

In addition, looking at why trustees change their fund manager, key drivers included changing investment strategy and de-risking, followed by past performance. While most trustees said that past performance was considered, under half, 48 per cent, said they looked at the past three years of performance.

Aon Hewitt senior partner John Belgrove said: “Clear insight is around the impact of scheme size on how a trustee views their task. In this context, size brings power and the ability to be selective – which is not present with smaller schemes. This can allow the larger scheme to use the asset management industry in a more solution-focused as opposed to product-focused way. However while all trustees naturally expect investment performance delivery from their fund managers, the key tasks of their consultants are more varied.

“We found that trustees of different-sized schemes look for very different things from their consultants, meaning it is hard to pin down a generalised statement of ’what trustees look for in their investment consultants’. A larger scheme may use its consultant for, effectively, a compliance check, or as a sounding board or as a bringer of new ideas. With a smaller scheme the relationship is different, with a greater reliance to be led or guided – reflecting their lesser resources."

LUBS Associate Professor Dr Iain Clacher added: “One of the most informative parts of the research was talking to trustees. When asked ‘How would you describe value in the fund management process – what is it you pay for?’ they succinctly summed it up as, ‘we pay for alpha, not beta’. However, in seeking the best performance, trustees made it clear that it is also about governance and the balancing of risk and return as well as the monitoring of these two factors. It is not enough to produce alpha by excessive risk-taking, as this does not fit with trustees’ focus on investment strategy.

“In looking at the relationship between trustees and investment consultants, the research demonstrated that smaller schemes are more reliant on their investment consultant than larger schemes, which is understandable given the resource constraints they face. However, in the case of the small proportion of schemes – of all sizes – who say they are totally reliant on their investment consultant, this is a real concern.”

The report looked at 197 mainly DB UK trustees and scheme managers, representing schemes ranging from less than £15m under management up to £5bn under management. Sixty per cent had assets under management of between £100m and £2.5bn.

Share Story: