The second blog on our Deadly Sins series is about Chairs, their boards and the potential pitfalls that they can fall into. Pension Funds need Chairs and a board of trustees, there is no question about it. Boards provide a much-needed organisational structure and help lead pension funds in a clear direction. Indeed, an example of this is that the chairs of 14 major pension funds have recently committed to net zero investment portfolios, this of course is a wholly positive event and shows the influence they can have in leading their funds in a direction which benefits all!
However, we at Avida repeatedly see certain sins which Chairs, and their boards fall into; these do not benefit the pension fund and in fact can lead it in a negative, damaging direction.
agenda driven by providers
The agenda of pension funds chairs are too often driven by their providers and not by strategic priorities. This is a problem as it gives too much control to the providers, which leads to them driving the decisions instead of the board. Therefore, there is a risk that the important areas for the pension fund are not discussed since they might not align with the provider's own interests or areas of expertise. For example, the provider might have an interest to sell their own products, which are in fact not what the pension fund needs. The other risk is that if the provider has too much control, then it gives them the freedom to create more complex portfolios with higher margins and higher monthly fees, which are not in the pension fund’s interest. An example in recent memory is the Wonga investment by the Church of England in 2014; clearly investing into Wonga was directly against the Church of England’s agenda since they explicitly disagreed with the high interest rates of the company. Therefore, does the investment show that the providers were in fact driving the agenda? We will leave that up to you.
who takes responsibility?
The agenda being dominated by providers highlights another important sin, namely Chairs not taking responsibility or ownership on behalf of the fund and letting independents or advisors drive the decisions. Chairs are often reluctant to make decisions on behalf of the board -- in some respects this is understandable as people do not want to be responsible if a decision backfires. However, if Chairs allow the pension fund’s agenda to be driven by external providers, then, as we have seen, this can be much worse for the pension fund.
Another sin which we often see is pension fund boards being dominated by loud voices, which means that not every voice is heard. These dominant voices are usually the trustees who find one area particularly interesting and therefore fixate on this area (such as a particular investment interest). These are not usually relevant to the pension fund and therefore areas of actual interest (which need to be discussed) are not!
However, at the same time we see that the opposite is true among other pension funds boards. More often than not, we see pension fund chairs engage in 'groupthink' where the aim for conformity leads to dysfunctional and irrational decision making. An example of this could be a suggestion from an advisor on an investment strategy. The board takes a quick decision to give a (false) sense of uniformity, instead of discussing the strategy. This again can be damaging as it leads to decisions not being properly thought out.
As we have seen, there are some areas where Chairs and their boards need improvement. However, what we want to highlight is that making these changes can make an enormous difference to your fund. With our extensive and varied experience, we can help with the governance of your pension fund to create a more efficient and successful fund which benefits all involved. Chairs and their boards can lead their pension fund in a positive direction which helps to achieve their objectives. However, sometimes it takes some reflection and assistance to reach this goal.