News & Views

How can the lessons from HBOS help pension trustees?

I have previously highlighted the fact that only 60% of lead investment consultants have a professional qualification.  Consequently many investment consultant firms rely on a consultant’s ‘relevant experience’ when certifying professionally unqualified personnel as competent with the FCA.  However, not all experience that investment consultant firms regard as ‘relevant’ stands up to scrutiny.

In a recent investment consultant tender exercise, which IC Select assisted in, one consultant firm put forward a lead consultant that had, in the view of the investment consultancy, 17 years financial experience, although his only qualification was the basic competency test, the Investment Management Certificate.  The consultant firm obviously hoped that his experience could compensate for the lack of any professional qualification.  However, closer examination of the financial experience revealed that the consultant had spent almost 16 years working as a client relationship manager for major fund management companies and little more than a year as an investment consultant.  The roles of a client relation manager and an investment consultant are both critical to the efficient operation of the pensions industry, but the skills required are very different.  Whilst both roles require excellent client skills, a client manager is responsible for explaining what has happened in the past, often to an agreed script, whilst the consultant must advise on the most efficient asset structure for the future against a background of considerable uncertainty.

A further issue, was that the proposed consultant’s experience as a client manager had been with equity funds, hardly relevant to advising on managing a diversified asset portfolio, possibly including a significant proportion of bonds and swaps, against a liability benchmark.  Needless to say, this particular consultant, lacking both relevant experience and a professional qualification did not get very far in the selection exercise!

This type of competence profile, with experience as a client relationship manager for a fund management firm and no professional qualification, is not uncommon amongst investment consultants.  For many years, investment consultancy firms have recruited client relationship managers from fund managers when they have needed to quickly grow or replenish their consultant resources.  In the 1990’s, in the middle of the equity bull market, this was less of an issue, as solvency continued to improve almost irrespective of the asset strategy followed.  However, in the more turbulent markets since 2000, this type of recruitment has contributed to a skills gap that may have been detrimental to the long-term performance at pension schemes.

It is difficult to imagine any trustee board appointing an actuary or lawyer without suitable professional qualifications and relevant experience.  Why then would they not expect similar standards of their investment consultants?  The Financial Conduct

Authority leaves it to the consulting firms to determine whether their consultants are competent.  However, the consulting firms definition of competence may often be significantly weaker than a definition that trustee boards believe should be applied. I would therefore recommend that all trustee boards consider carefully whether their investment consultant has the necessary competency for the advice they give. Such an approach may help their fund avoid a similar level of failure that befell HBOS and keep them out of the Pension Protection Fund.

The question who is the odd one out, Sir James Crosby, Andy Hornby, Lord Stevenson, all formerly of HBOS, or Terry Wogan was recently posed.  The answer is Terry Wogan, as he is the only one with a banking qualification and prior experience of working in banking.  Had the other three also had professional qualifications and experience in banking maybe the problems of the last five years could have been avoided or at least significantly reduced.  This ‘odd one out’ question neatly highlights the issue of professional competence, as a combination of both professional qualifications and relevant experience.