23 September 2019
When British swimmer Adam Peaty touched the wall in Gwangju South Korea on 21 July 2019, the project was complete. Peaty, already the fastest man ever and Olympic champion, clocked a (staggering) time of 56.88 seconds, becoming the first person to complete the 100m breaststroke in under 57 seconds.
Launched over two years earlier, Peaty’s ambitious “project 56” was his way of articulating his next objective in swimming - be the first man under 57 seconds.
Clear objectives play a big role in helping to get you to where you want to be and the journey you want to make. They give a yardstick for progress and they can help make decision makers and other parties more accountable. They have been one of the factors differentiating those DB schemes that have performed well over the last decade from those that have struggled to make headway. These considerations and others are behind the CMA’s requirement for each board of trustees to have set objectives for their investment consultant from December 2019. While this might first appear a bit like a compliance requirement to some, it is actually an opportunity to have a great and honest conversation with your consultant covering things like: what does success look like, what exactly are they responsible for, and what is expected of them.
The Pension Regulator has already published guidance for trustees on how to set objectives for their consultant, and our experience is that trustees have found these a very helpful starting point, but with 34 different suggestions what many trustees are seeking to do is narrow this down to a more manageable number. With the deadline looming, and this set to become an important agenda item at many September and October trustee meetings, this blog focuses on what we think are the most important areas to discuss when it comes to setting objectives.
How to set objectives for your investment consultant under the new guidance
It’s important to start by asking a few key questions:
- What is really the job of an investment consultant?
- What are they responsible for?
- What can they control?
These questions help understand what works, what good looks like, and where and how consultants have been able to contribute positively to DB pension outcomes.
Part of the job of a consultant is focusing the minds and attention of trustees on the right things in a noisy world. A good consultant can help you see the wood for the trees, and provides a crucial understanding of risk to the trustees, helping them eliminate sources of unwanted uncertainty.
The reality is that consultants can’t guarantee or even directly influence many outcomes – risk is taken (or accepted) in a number of areas for all sorts of reasons, so it is all about understanding those risks and choosing when and how to mitigate.
Objectives ought to recognise the inherent uncertainty in the domain of investing, there will be a lot of randomness in outcomes over short periods of time, and while this isn’t under the consultant’s control they can influence where time and attention is spent, and have a key role in promoting awareness of risks and ensuring no surprises. These things are crucial over the years.
Bringing in new ideas, changing allocations and managing transitions are all areas where a consultant can add considerable value, given the overall sums of money at stake even small fractions of a percent can equate to very meaningful amounts of money being gained or lost. The relational nature of the service is crucial to consulting, so creating and maintaining this relationship and service level ought to play into the objectives.
Your objectives are likely to be a lot more multi-dimensional than swimming 100m in under 57 seconds. And we love quantitative objectives that can be measured, but as the saying goes: not everything that can be measured matters, and not everything that matters can be measured. Presumably you wouldn’t pat your investment consultant on the back if the funding increases due to changes in mortality assumptions?
So the objectives you think at first blush might be obvious, in fact aren’t. Our experience is that this is a very enlightening process to go through with clients. An honest conversation around what the consultant is responsible for and what’s in their control will help develop an understanding of what really matters, what could knock you off course, which risks you want to accept and which risks you want to manage. Rather than a burdensome regulatory tickbox exercise our advice is to take the new rules as an opportunity to evaluate and define what your consultant is expected to deliver.