15 May 2015
Pension funds turning to independent reviews, says Anthony Hilton
When British Telecom (BT) recently found itself in difficulty its finance director remarked that the size of the company’s pension fund deficit had served as a poison pill. No matter how tempted predators might be to seek to acquire it, they knew that in doing so they would also take on responsibility for the scheme. The risks associated with that were a step too far.
BT is not the only company whose independence has been preserved by the scale of its potential pension liabilities. For some companies, its pension scheme has more assets than the business and for others, even if the pension fund is smaller in value than the business, it is still a large sum.
Although the boards of quoted companies are held to increasingly high standards of governance, the same pressures do not apply on the pension fund. In many cases however, problems that could potentially embarrass the company are as likely to emerge from this source as they are from its operations.
Perhaps with this in mind some pension funds have decided to commission an independent review of trustee board effectiveness from some of the same specialists who do work for plcs. It is not that the trustees think that there are problems with their pension administration and governance, rather that it is always valuable to get an external perspective.
As with main board evaluations the process is painstaking as opposed to than painful. Having agreed the scope of the review with the chair, the consultants will immerse themselves in the information supplied to the board to cover a full annual cycle of the scheme’s operations, together with background documentation. The purpose of this is to assess the quality of the papers and become familiar with the issues of the particular scheme.
This is followed by detailed interviews with key people: each individual board member, some of the pension staff and some senior executives in the sponsoring company. External advisers, who have experience of the organisation and support specific functions, such as internal audit and the company secretary, may also take part. These interviews are key to the success of the process and are where the real skill of the reviewer comes to the fore in preventing it from being a box-ticking exercise by teasing out the real issues.
Next they will attend a meeting to see the board in action, how the personalities interact, how the agenda is handled and decisions reached, and to judge whether the papers do provide the information needed.
The review team then puts all this together into an assessment. This can take a surprising amount of time, as it involves looking at areas where directors do not agree, identifying the causes and considering practical ways of dealing with these. The aim is to produce recommendations which go with the grain of the organisational culture, as this makes them more likely to succeed.
Most who conducted reviews say they found it helpful. Some said it defused tensions with the sponsor, others said it made them aware of the practical difficulties employee trustees experienced in finding time for their duties when they were not supported by line managers. Board papers were seen to be inadequate with too much wrong information and agendas which wasted time on routine rather than the important issues. It picked upon how habitually contrarian members could continue to make their points without being tiresome, and how those from a professional background could avoid appearing to patronise those less familiar with the material.
It is often said that in the whole canon of corporate governance, board evaluation stands out as the most useful innovation because it recognises that business success comes from working together as a team. The best teams are created not by discussing what is good or bad, or causing embarrassment and angst, but by creating the environment which supports the team’s attempt to do the job better. If that works for the board, surely it also has value for those grappling with the problems of pension funds.