I have devoted a significant part of my career advocating strong governance in the financial sector.
So recently, I decided to take a step back and reflect on what effective governance is all about. It is described in Wikipedia as “comprising all of the processes of governing – whether undertaken by the government of a state, by a market or by a network – over a social system (family, tribe, formal or informal organisation, a territory or across territories) and whether through the laws, norms, power or language of an organised society.”
Importantly, this definition extends way beyond board diversity, skills and composition, roles and responsibilities. It’s about who does what to make things happen, and how they get the authority to make decisions. For pension funds in particular, what does this mean?
At the core of the matter, on their flight plans de-risking the way to maturity, lie two contrasting governance models facing pension funds. The first of these I refer to as Auto-Pilot. In this case the trustees set the destination for an external party (a fiduciary manager, perhaps) to implement their financial strategy. The executive function at the pension fund keep an eye on progress, being there to step back in where necessary - in a crisis, for example or if other operating parameters are breached. The second model, which I term Flight Deck, can be likened to the executive and trustee teams occupying permanent places in the cockpit, with the skills of the in-house team and external resource needing to evolve to the different decisions required as the destination becomes closer.
But while most discussions of pension fund flight plans focus on the financial dimensions of funding, investment and covenant, the mix of internal and external resource required to implement the plan is, in my opinion, the key consideration. Whilst pension funds are doubtless operating to a model that best suits their current needs, the impact of COVID means they are all facing a New Abnormal. For customers of AON and Willis Towers Watson, facing a merger of these two organisations, this abnormality looms even larger.
Right now is a good opportunity for all - and for some a necessity - to consider whether their governance model will be resilient to the demands of the flight plan ahead. Their operational and resourcing jigsaw may require fundamental re-assembly.