With the deadline of April 2024 fast approaching, it is imperative that a discussion about critical reviews is on the agenda for all upcoming Q3 Trustee meetings. The following paragraphs will hopefully assist your discussion.
The Pension’s Authority published the final version of their Code of Practice for Trustees of occupational pension schemes in November 2021. The Code of Practice requires Trustees to conduct critical reviews of both Investment Services and Administration Services at least every three years. For Investment Management services, Trustees can use their discretion to extend the period for critical reviews to a total of five years, but if doing so, the rationale underlying the decision to defer must be clearly documented. The purpose of the critical review is to consider whether to retain or possibly replace the existing service provider, and a summary of the process undertaken and the reasons for the final decision must be clearly documented.
At Acuvest, we have always been firm proponents of the importance of independent advice. In relation to critical reviews for occupational pension schemes, we find that our viewpoint aligns closely with the guidance provided by the Pensions Authority as can be seen from the following extract from the Code of Practice:
“The trustees must give consideration to conflicts of interest that may arise for their advisers when the latter are asked to advise on the appointment of investment managers. In such situations, the trustees must carefully weigh such potential conflicts of interest when appointing investment advisers and considering advice received. When acquiring and considering information in relation to the appointment or retention of investment services, the trustees should consult with independent experts to the extent that they require assistance with identifying potential investment managers, organising requests for proposal and interviews, understanding the capabilities of proposers, making comparisons, and analysing costs. Such assistance must be obtained, whenever possible; from parties who do not have a direct conflict of interest in advising the trustees”.
Acuvest approach:
Acuvest has over €4.5 billion in assets under advice and we provide investment consulting services to a number of the largest schemes in the country. Critically reviewing investment managers is not new to us, as many aspects form part of the manager due diligence and ongoing oversight processes we provide as part of our investment consulting services. We have long established processes in place and helpfully we also have good working relationships with investment managers across the globe.
The Code of Practice is not overly prescriptive on the format of critical reviews so, as a starting point, Trustee Boards will need to agree the scope of the initial critical review and decide what can practically be achieved between now and April 2024. In agreeing the scope of the review, addressing the following questions may be helpful:
- Do we fully understand the objective(s) of our existing investment mandates?
- Is our current investment consultant truly independent or do we need external support?
- Is the current reporting adequate? Does it assess performance against appropriate benchmarks, and do we conduct periodic peer analysis?
- Do we have investment management agreements and fund prospectuses to hand? Do they meet the contractual requirements set out in the code of practice?
- Is a desktop approach sufficient or should we do onsite visit(s)?
- Can we build off existing annual review documentation?
- Do we understand the fees we are paying? Could we get better value for money for scheme members, and when did we last check?
- For active managers, has there been investment process or organisational changes, has the team changed and are there any notable fund flows?
- Do we understand our existing membership, and how the investment choices they are making align with their investment needs & objectives? Would some preliminary analysis be helpful to better understand the investment choices of scheme members?
Other considerations:
It is noteworthy that, in addition to the regulatory sea change that has been taking place, the investment environment has also changed significantly, and we are now in an environment of slowing growth, persistent inflation and we have witnessed a dramatic increase in bond yields. The performance of your investment managers versus expectations through a challenging period in investment markets, will need to be carefully considered as part of the critical review of your investment managers.
When you commence your critical review, remember to keep one eye on the scheme’s outsourcing policy throughout the process. Like all projects, good planning and project management will be required to meet the April 2024 deadline which is unhelpfully also the deadline for your scheme’s Own Risk Assessment. Your scheme secretary is going to be busy, so be nice!
If you require support with the critical review process, we believe that our experience and independence mean we are ideally placed to help. Please get in touch.
Edward O’Hanlon is a Director and Head of Corporate Business in Acuvest, an Irish-owned, independent advisory firm specialising in corporate pensions, wealth management and investment advisory services for individuals, companies, charities, and institutions. Email: edwardoh@acuvest.ie
