The 7 Habits of Highly Effective Trustees

Opinion piece by Andrew Davison, acsis Head of Institutional Asset Consulting

Being elected to be a trustee on a company’s retirement fund is both an honour and an onerous responsibility. It is an honour because you have the potential to truly make a difference in the lives of the fund members. However, it is also onerous as the retirement fund landscape is complex and trustees need to have at least a basic understanding of the legislation, the investment and asset management arena, risk, employee benefit structures (including death and disability benefits), administration and systems, accounting and liabilities and even actuarial concepts such as discounting and mortality.

Despite this, many trustees perform these duties on a part-time basis without remuneration and their employers seldom recognise their trustee duties, either in their performance appraisals or in some reduction in their workload to allow them to dedicate the required time to their trustee duties.

In light of this, it is critical for trustees to be highly effective in their duties. Trustee meetings are generally held only once every quarter and there are several issues jostling for attention on the agenda. Trustees therefore need to use their time wisely and make sound decisions that will benefit the members. Although there are by no means only seven things for trustees to focus on, it is useful to identify seven key habits to assist trustees to be as effective as possible.

habit 1: focus on the fund’s objectives

The first, and without doubt the most important habit is to always focus on the fund’s objectives and ensure that all decisions are centred around those objectives. That being said, it is vital that the fund’s objectives are clearly defined and thoroughly understood by all trustees.

The primary objective of most retirement funds is to assist members to support themselves during their retirement and perhaps to provide benefits to their dependants in the event of their death or disability. To successfully deliver on these objectives, trustees need to assess and understand how their decisions are likely to affect their members’ ability to achieve the stated outcomes. This is where replacement ratios can be valuable as they give trustees an idea of what is being targeted for each member. Once replacement ratios have been set, trustees can then monitor them on an ongoing basis to see how their decisions affect those ratios over time.

habit 2: know when to be patient

While patience may seem to be an unlikely requirement, it is critical for trustees to be able to identify the right time for exercising patience and the right time for taking action. For example, the time for action is when trustees are setting objectives and developing the fund’s investment strategy. To do this effectively, they need to fully understand the fund and its members and then design a sound, long-term investment strategy that is managed by carefully selected quality asset managers. The time for patience comes once the investment strategy is implemented as the trustees need to allow the strategy and the managers to do their jobs. Being tempted to interfere and make frequent changes, especially in reaction to market conditions or events, is dangerous and can destroy members’ wealth.

habit 3: be brave and have conviction

Once again, this is not necessarily an attribute that one looks for in a trustee. However, bravery is important as trustees will come under pressure from members at certain times as many of their decisions may not always be accepted. It is vital for trustees to have complete conviction in their decisions. Without conviction, they risk vacillating between different alternatives and this can have serious consequences, particularly when it comes to investments.

In addition, trustees may be required to stand up to each other at certain times. Sometimes, this may entail a junior employee within the company disagreeing with a senior employee. In the context of the fund, they are both trustees with equal standing and this needs to be honoured by all trustees and bravery should be encouraged.

habit 4: be diligent, dedicated and organised

These three qualities all relate to taking trustee duties seriously and setting aside time to do the job properly. Being diligent ensures that trustees apply their minds and prepare thoroughly in order to make informed decisions. Being dedicated means that they allocate the time and educate themselves around their trustee duties. Lastly, being organised ensures that trustees do not waste time revisiting previous decisions, getting sidetracked by trivial matters or focusing on the wrong issues during their meetings. It also means that they use their limited time effectively.

habit 5: keep it simple

As mentioned, the retirement fund landscape is complex and there is a variety of options and choices available to trustees regarding benefit design, investment strategy, risk benefits and service providers. Although this can be a daunting challenge, keeping things simple will allow trustees to maintain a good handle on their fund, keep costs down, reduce any strain on the board’s resources like time and skills and allow effective monitoring.

habit 6: don’t just accept, always question

Questioning is an immensely valuable habit as it ensures that service providers are constantly evaluating their own advice and service and ensuring it is well researched and in the interests of the fund and its members as they know they will be questioned on their reasoning. Asking questions also allows trustees to constantly learn and develop their understanding of the various aspects of the fund. If the questions are valid and truly probe the key issues then they can also uncover problems at an early stage before they develop into crises.

habit 7: encourage robust debate around decisions

Finally, an effective trustee board is generally one with a diverse range of skills, interests and backgrounds. Robust debate is important as decisions need to be carefully deliberated. In some cases, trustees may be divided on a certain decisions so it is critical that the board does not simply compromise. While compromise is sometimes required, it can lead to a sub-optimal result. For example, where a board is selecting a multi manager and has narrowed the choice to two similar managers, it would be unfortunate to simply compromise and appoint both because the trustees are divided. This decision could result in an over-diversified portfolio with little chance of outperformance and at high fees relative to a basic passive solution. In this case, it would be more effective for the trustees to apply their minds and engage in a meaningful discussion around which manager would best serve the fund’s objectives.

In conclusion, making sound decisions that are always in the best interests of members is by no means an easy task. However, focusing on these key habits can make a big difference in how trustees interact and can positively influence their decisions. While these seven habits may seem simple, they hold significant rewards for members, whose well-being in retirement can be enhanced through their trustees’ decisions and actions.