Investment governance can be seen by some as a necessary evil. I however see it as one of the most important things we as pensions providers do. This includes the setting up of a fund range in partnership with the adviser and the employer to the maintenance of a working relationship with the fund managers. But in my opinion, what is even more important is the role we play for the employee.
We know from industry research on default funds that members see them as a fund which is monitored by the provider – hence a safe haven. This of course is not the case, but it gives us a very important insight: that members of a scheme typically see their pension provider as taking a very active role in making the most out of their savings. And fund governance gives us an opportunity to fulfill this role.
A good governance process needs to ensure that controls are in place to monitor funds and that they remain suitable on an ongoing basis. A formal annual renewal programme that reviews all funds on the platform, highlights areas of potential weakness and provides the opportunity to add relevant new asset classes, should also be in place. At Friends Provident we operate a Unit Linked Investment Committee that provides this formal control and governance process.
Our ongoing monitoring process ensures funds are continually under review with the process being based on both quantitative and qualitative triggers. This is designed to identify potential issues at early stages, with performance reviews every quarter and manager reviews every 6 months. It also identifies potential material changes to the fund such as changes to strategy, process or management.
Performance and risk targets are used to escalate monitoring to ensure funds are suitable for inclusion on the platform. Funds may have a good reason for differing from their peers, but you do need a process that reviews this regularly.
Once a fund is on the watch list, specific criteria are identified for improvement: if the criteria for improvement are not met by the target date then the removal process is initiated.
Before removing a fund, we will have a final meeting with its management team. We also source an alternative fund. We consult with key stakeholders and when we receive final sign off from the Unit Linked Investment Committee, the fund is closed to new investors and the assets are transitioned to an alternative fund.
In summary, for the members of a scheme as well as the scheme sponsor it is important to have a robust investment process that is reviewed regularly. This is not a trivial task and providers need to be sure that they can implement their processes for all their funds on their platform. That leads to an important question: for how many funds can you feasibly ensure that such a robust process is being followed? Does it make sense to keep adding more and more funds to your pensions platform?
I feel that the number of funds on a provider’s platform should be limited by the ability to keep them well governed. After all, behavioural economics tells us that offering too many funds can be daunting for members and can lead to the member not making a choice at all. So, instead of further increasing the choice available, we as providers need to be prepared to make tough decisions and on occasions restrict the numbers of funds available and not be shy in taking funds off the platform.
This will increase members’ trust in the funds available and increase their willingness to make a decision.