News & Views

Improving the Trustees Knowledge and Understanding (TKU)

Reading the Scope Guidance of the Pension Regulator’s Trustee Knowledge and Understanding (TKU) you could be forgiven for assuming that a pension scheme’s most important advisers are the fund managers.  Specific sections require trustees to know how to select a fund manager and how to monitor their fund managers.  By contrast, there is no mention of the selection and monitoring of the investment consultant.  However, this is at odds with the academic evidence, that shows that less than 10% of a funds long term return and risk results from stock selection, the role of the fund managers, and over 90% from strategic asset allocation, advised by the investment consultant.

Why then does the TKU ignore the investment consultant and concentrate on the fund manager?

I recently posed this question to a senior investment consultant at a major firm.  His reply, laughingly delivered in a candid moment, came as a surprise to me.  “We and the other investment consultancies seconded personnel to the Pension Regulator to help develop the TKU and the related Trustee Toolkit.  Our consultants were always going to emphasise areas where we could add value, whilst ensuring that there was nothing that could undermine our business or put us under unwanted scrutiny!”

If it is true that the TKU was developed, at least in part, by seconded investment consultants, then it is just as likely, and less cynical, to believe that the seconded consultants put their best endeavours into the work.  However, this would inevitably be done from their perspective, a perspective that does not include scrutiny of investment consultants, but does contain a significant emphasis on monitoring fund managers.

The amount of change at investment consultants is now just as great as at fund managers.  The old model of appointing an investment consultant for a number of years, without regular review, is no longer fit for purpose.  Consequently, the Scope Requirements of the TKU should be expanded to include information on how to select and monitor investment consultants in addition to the selection and monitoring of fund managers.  In the meantime, trustees should look to develop a framework for regular monitoring of their investment consultant whilst continuing with their existing fund manager due diligence.  In monitoring their investment consultant trustees should seek to answer similar questions to those posed in fund manager monitoring.  For example:

    • Have any key personnel left the firm in the last year and, if so, could this affect the advice we receive?
    • Where has overall fund performance been weak and how can this be improved?
    • Is our investment consultant continuing to work well with the Trustees?
    • Have their been any significant changes in the consultant’s risk models that could impact on decision making?
    • Have there been any recent corporate changes that could affect our service?

As such an improvement in governance becomes common place across pension schemes, the need for the scope of the TKU to be updated to reflect this improvement will increase, although perhaps this time, with slightly less input from investment consultants.


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9th November 2012