The Scale of the Challenge
Experienced board chair, iNED and Fund Boards Council member, David Butcher, reflects on the governance challenges facing AFM boards and the learnings that they can take from the experience of Master Trusts.
The experience of master trusts – a defined contribution, occupational pension scheme set up as a trust for multiple employers – in assessing value for money may prove instructive for UK authorised fund managers just getting in on the act.
The aim here is to illustrate the scale of the challenge facing the boards of authorised fund managers (AFMs) by reflecting on the lessons learned and challenges facing Master Trust (MT) boards.
When it comes to the question of value for money for customers, MT are rather ahead of AFMs having been assessing “value for members” for several years now. I would suggest that MT boards have worked tirelessly in assessing value for money for MT scheme members. It is all laid out in the annual “Chair’s Statement”, and there is no question that the principles and content of MTs Chairs’ Statements comply with the Pension Regulator’s (TPR) requirements.
Yet, there is only one problem. Value is not something that can be created by the provider and the Board. Value is fundamentally what is experienced by the member. The result, therefore, of the “value for members” exercise is that whilst it has improved the quality of governance, it has simply become a box ticking exercise for TPR. There largely remains a disconnect between MT boards and their members and addressing that disconnect represents a significant challenge.
The disconnect is also hardly surprising. Chair’s Statements vary in quality but in the main they are complicated, full of jargon and dull in the extreme. Hardly a recipe for user friendly, digestible communications.
So how to fix this disconnect? I believe there can only be one answer.
As MT boards are responsible for ensuring best possible outcomes are delivered for members, there has to be greater engagement with members to better understand what represents value for them. And unsurprisingly, dear reader, this will require a new approach to governance, and I would like to describe it as proactive governance.
This form of governance will have to focus on enhancement as much as protection. It will be that effective form of governance that will drive improved outcomes. And I suggest that the only way independent non-executive directors (iNEDs) of MT boards will be able to deliver enhanced governance will be to become more engaged with customers.
Whilst you ponder that, there is the other big issue of trust. I posit that trust is the new battleground in all walks of life. Trust will be an integral part of how members assess value, consciously or otherwise. So how do MT boards define trust, or the feeling of being trustworthy? Developing this will be key, and this is a massive challenge in itself.
Transparency will be a key component of building trustworthiness, and simplicity is key to transparency. But what, might you legitimately ask, have we as an industry been doing for the past 50 years? The answer quite simply is: obfuscating deliberately and communicating complexity. Communicating simplicity about complex products is easier said than done, and another massive challenge for our industry whether you are involved with a master trust, or an AFM board.
And on that point, these challenges for MTs are, I would suggest, exactly the same for AFM boards. The disconnect with customers, the lack of trust, the complexity of communications, the obfuscation, the importance of culture, the need for more proactive governance – these are identical challenges for AFM boards.
And that all comes back to the need for outstanding leadership on the part of the independent chair and iNEDs on AFM boards. For iNEDs on AFM boards, the process will be twofold, I suggest.
First, developing a process that produces information based on the Financial Conduct Authority’s (FCA) seven Assessment of Value (AoV) criteria under the Asset Management Market Study that is digestible by the board. And second, and almost more importantly, finding an approach to presenting the information that is digestible by the customer.
The first process has been developed by MT boards but the latter largely has not. If this does not happen with AFMs, the risk is that the FCA’s AoV will end up being nothing more than a compliance exercise, not therefore achieving the FCA’s objectives for customers.
Which leads to the key question: how are the AFM iNEDs going to exercise their independence for the benefit of customers? Having a set of seven criteria is one thing, but solving that disconnect and trust deficit are quite another. Building engagement and trustworthiness – which adds to value – are huge challenges.
Culture will be crucial. Given the headwinds facing the asset management industry now, if culture is not properly defined and managed it is far less likely that AFMs will be successful in delivering better outcomes for customers. It is the AFM board chairs and the iNEDS who will need to define the culture; which, rather predictably, all comes back to leadership.
The risk is that AFM boards will go through the same process as MT boards and the AoV will also end up as a rather monumentally orchestrated compliance exercise. Developing more proactive governance to improve engagement to address the trust deficit will be the critical success factor.
For MTs more proactive governance will be an evolution, albeit a fairly rapid one. For AFMs it may just need to be a revolution if they are to meet the FCA’s requirements, and deliver value to their customers.
David Butcher is passionate about proactive and effective governance. He is an experienced and current board chair and iNED and believes that UK fund boards are ready for a fundamental change in their operating outlook.
David can be contacted at firstname.lastname@example.org and 07785 592751.