OPDU Report 25 - November 2008

Trustee Effectiveness Assessment
Avgi Gregory

Trustee Boards must not be the ‘weakest links’ in a governance chain that prevents pension funds from operating effectively.

A truly effective trustee board is a prerequisite for a well managed pension scheme. So what stops many trustee boards from routinely reviewing their own performance? After all, public company boards have been doing this for years. Perhaps the practice is less common amongst trustee boards because only minimal guidance is available.

So why should trustee boards evaluate themselves?

What should the process be?

When should it be done?

Paul Myners first raised the issue of trustee performance measurement in 2001 in the context of pension fund investment. Seven years on, this is
the area where least progress has
been made in applying the Myners’ Principles. But since 2001, others, including the Pensions Regulator and the NAPF, have encouraged trustee boards to take a critical look at their own performance. 

According to the NAPF (Review and Recommendations on Myners Principles for Pension Funds – November 2007): just 27% of funds had formal measures in place to assess their own performance and 37% had informal measures in place.

Further measures will be needed to provide trustees with the tools, support and encouragement to embed self-assessment in trustees’ regular activities.

In their report, the NAPF made eight key recommendations, one of which is that:

Trustees should periodically under-take formal assessment of their own performance and that of the board. Trustees of schemes with assets in excess of £250m should undertake periodic reviews of their own performance, and provide feedback on this in the annual report and accounts.

Performance assessment by trustees historically focused largely on invest-ment managers; then extended to service providers such as admini-strators. More recently the performance of professional advisers has come under regular scrutiny. A focus on trustee performance is a natural extension of established performance assessment activity.

What are the benefits of Trustee Effectiveness Assessment?

• Feedback helps trustees to focus on their role and on the right issues, both as a board and as individuals and can only be a positive influence on decision taking.
• Trustees become more confident that they are executing their responsibilities to a high standard.
• A trustee board that is seen to set high standards for itself is likely to demand high standards from all key players in the governance process, whether they be administrators, professional advisers or others.
• Provides assurance and comfort to members, auditors, insurers and sponsoring employers.
• Financial performance can improve – in his 2007 book “The Pensions Revolution – A Solution to the Pensions Crisis”, Keith Ambachtsheer (KPA Advisory Services) refers toperformance improvements of between one and two per cent per annum as a result of good governance function.

So why would trustees not look to embed continuous improvement through regular effectiveness assessment into their governance practices?

Since the first publication of The Combined Code on Corporate Governance, there has been an increasing focus on the value of, and approaches to, assessing the effective-ness of public company boards. So what can pension trustee boards learn from company boards about effective-ness assessment and the commu-nication of results to stakeholders?

The evaluation process

There are five broad sets of issues that must be decided before embarking on a trustee board evaluation:

• Who should conduct the evaluation?
• Should the board evaluate itself or ­
• Who is to be evaluated? Should it just be the board, or should the various committees also be included in the process?
• What are the issues to be covered?

For example, should the evaluation only address ‘hard’ issues – such as the meeting schedule, time allocation on the agenda or circulation of papers – or should it also look at broader questions of culture and behaviours?

• What form should the evaluation take?

Assessment Options

How Trustees can carry out effectiveness assessment on themselves:
Option 1: Build some very basic self-assessment into the way the trustee board operates on a regular basis by having an agenda item at the end of each meeting (how did we do today?). 

Option 2: Internal evaluation usually involves structured discussions between the chairman and board members, sometimes supported by the circulation of a questionnaire to board members that is completed confidentially and then discussed by them. Use of a questionnaire1 should enhance the value of the process.  Beware though that an internally managed process may be prone to being self-congratulatory. But it is a low cost option and may be the right first step for many trustee boards.

Option 3: An independent consul-tant could develop a customised questionnaire that digs more deeply into issues pertinent to the way the trustee board is set up and operates. It could include statements on the clarity of roles, responsibilities and business planning; it could also cover board and committee structures, skills and training; board processes, e.g. conflicts management, meetings management, risk management and monitoring pro-cesses. Softer issues can also be addressed e.g. culture, behaviours, chairmanship (both board and committee chairs); the effective-ness of the Secretary and how the board engages with the employers and the members. Lastly, it can help trustees to identify and address governance priorities.

To encourage all trustees to contribute openly and constructively, all feedback should be anonymous.  The consultant would collate all input from the questionnaires (which might be paper based or on-line), conduct the analysis and deliver a report. The results would be discussed in a meeting or workshop facilitated by the consultant, ideally without any of the regular advisers in the room so that the board can have an unin-hibited discussion about its own performance and effectiveness.  

Option 4: The questionnaire could be supplemented with confidential one to one meetings with all trustees. The secretary and selected advisers could also be included. With confiden-tiality and anonymity assured, the information gathered at such meetings may provide the most constructive insights on the strengths and weak-nesses of a board or a committee.

Option 5: Another valuable, but optional, component of assessment is confidential 360 degree-style feedback to the chairman, the secretary and each trustee individ-ually. 360 degree feedback can be particularly relevant where a trustee board is really keen to encourage the development of the trustees individ-ually or where there are problems with trustee board dynamics – for example: frequent disagreements, underperforming trustees, awkward personalities or strong egos. It also provides the chairman with an oppor-tunity to reinforce the board’s values and expected behaviours as these will have been tested as part of the 360 degree feedback process.

Option 6:  Psychometric testing can be incorporated into assessment in the same way that it might be used in recruitment or team building exercises. 

A good assessment takes a broad perspective. It looks at the culture of the board, its team dynamics, and the relationship between board members and between the board and its committees. If the point of trustee assessment is to improve performance then valid insights into the behaviour of trustees, both individually and collectively, are crucial. This is what company boards do and some trustee boards have been early adopters of such techniques.  

Of course trustees can ‘mix and match’ from the various options above. What is critical  is that they use a process that recognises the unique aspects of their pension scheme and
is right for their trustee board.
 A popular approach is a ‘hybrid process’ combining a customised self-assessment exercise enhanced by the involvement of an external facilitator. This is an approach being followed by numerous company boards.

Just as in any formal performance appraisal system, there should be no huge shocks. If the board is doing its job well, then the end result of the evaluation process is unlikely to be seismic. A well-managed evaluation should primarily encourage the board to focus on what is important and to adjust its thinking and its actions accordingly. Small shifts in thinking and behaviour can produce substantial impacts.

Let me finish with some learnings from recent experience:

• One size does not fit all; what may be right for one board may not be right for another.
• The chairman should embrace and sponsor the process if it is to be successful.
• A trustee effectiveness assessment should not be initiated to deal with known issues affecting performance (if they are known then they should be dealt with first).
• A trustee board that fails to follow up on the findings of self assessment would have wasted its time (and money).
• A board evaluation should not be considered a box ticking exercise or a ‘good to be seen to do’ activity. Correctly designed and managed, it can play an important role in improving the effectiveness of the trustee board with positive consequences for the pension scheme and its stakeholders.

An effective board will give members and the sponsoring employer more confidence that the pension scheme is well managed. Pension schemes managed by effective trustee boards are more likely to enjoy sound and effective decision making. Regular effectiveness assessment can help trustee boards ensure that they continue to be fit for purpose in an ever evolving pensions environment.

“No board has reached a state of perfection and states of near-perfection can never be taken for granted.”
Neville Bain, Chairman of IOD

Avgi Gregory
Director
Muse Advisory
0845 68900 340
avgi@museadvisory.com
www.museadvisory.com