This discussion demands clarity first. In fact, the topic should have been more appropriately titled, “Trustee Remuneration? What, and Why, Remuneration?”
With that out of the way, let us dig in.
At a time when the regulatory and legislative provisions are becoming more and more onerous, governance obligations forever increasing, requirements to hold trustees to even higher standards becoming much more pronounced, potential for trustees incurring legal liabilities worsening, and economic pressures mounting, this conversation could not possibly have been any better timed.
But, first things first.
There are few industries that are as conservative as the pension fund industry. It is an industry built on “sticking with the tradition”. In its modern history of more than two centuries, or even over its extended ancient history dating back to the BC era, the industry has remained dominated by very few, slow-to-evolve, practices. Views and practices on trustee remuneration is one of them. That it is a trust-based industry possibly partly justifies why old, supposedly tried-and-tested practices tend to stick along forever. In the 21st century however, where disruption is quickly replacing old norms everywhere else, one of the industry’s virtues is probably slowly becoming its own vice.
In the Trustees We Trust
Trustees, so the role demands, are held to a “prudent person” standard in regard to meeting their fiduciary responsibilities.
According to the Organisation of Economic Corporation and Development, OECD, trustees “should be subject to minimum suitability standards in order to ensure a high level of integrity, competence, experience, and professionalism in the administration of the pension fund. The governing body should collectively have the necessary skills and knowledge to oversee all the functions performed by a pension fund, and to monitor those delegates and advisors to whom such functions have been delegated.” Frankly, quite a weighty responsibility.
Trusteeship No Charity Calling
Contrary to the seemingly more convenient notion, trustees are not remunerated only for the time spent in meetings, or in preparation for those meetings. Instead, trustees are remunerated in recognition of the burden of responsibility and accountability they carry with respect to members’ retirement savings. They are also paid in compensation for the risk exposure and potential liability that the appointment comes with. That clarity and emphasis is very important if we are to attend to the issue of trustee remuneration comprehensively.
While there is a school of thought that would want to draw similarities between trusteeship and a voluntary charity calling, with the benefit of what we know now, this runs parallel to the model required for an effective discharge of duties from trustees. A more practical way of looking at it is to compare the financial costs of remunerating trustees versus the opportunity costs of not doing so. Where trustees are not remunerated, we can expect, unsurprisingly so, lower levels of commitment that lead to poor overall fund performance. In fact, trustees will carry with them a legally binding, but non-incentivised, sense of accountability that affords members no real legs to stand on to demand it. Need no emphasis, but the quality of input and commitment from a well-remunerated trustee is never at par with that of a non-remunerated one. Non-remunerated trustees, given a choice, would rather be doing something else that is financially rewarding instead of sitting in those many-hours long board meetings.
Here is where it gets more technical. The problem is never that trustees do not attend meetings, the real problem is that they do so with very little preparation. They just do not invest that much time for the meetings. Research, both regionally and internationally, has shown that remunerated trustees come better prepared to meetings.
There is a provision in trust law that advocates of “zero trustee remuneration” are quick to quote in support of their advocacy. It says something to the effect that, “trustees should not profit from trust property”. This needs to be looked at a lot more closely. What is specifically frowned at in law is profiteering, and not fair compensation in return for legal responsibilities assumed and services rendered.
From what is fast becoming a regional and global corporate governance code, Principle 14 of the King IV Code states that the governing body should ensure that the organisation remunerates fairly, responsibly, and transparently, so as to promote the achievement of strategic objectives and positive outcomes in the short, medium, and long term. Trustees, as board members, are included in the provisions of that principle.
With average tenures of between three to five years, and provisions for renewal of at least once, an individual trustee can control how a member’s retirement savings are managed and administered for a good ten years. That is, one trustee can shape and influence the path a member’s retirement savings take for a period stretching to about a quarter of that path. Members, with full recognition of this, if it was left to them, no doubt, would voluntarily offer to remunerate trustees.
Push backs on views are quite common in our industry and at times it seems they are part of our DNA as a collective. We often debate issues so much that we, occasionally, end up missing the forest for the trees. This matter too can easily be pushed back on. While the old school of thought of non-remunerating trustees might have sustained itself to this day, we raise it here because remunerating trustees is just the right thing to do. In 2001, in the now UK famous Myners Report, Lord Paul Myners, and may his soul rest in peace, put it rather bluntly – “Trustees must be paid”. Period.
Where some pension funds’ balance sheets are by far bigger than the balance sheets of their sponsoring employers, doubting the issue of trustee remuneration should be unimaginable. Contesting it should be worrisome if the demands for full commitment and accountability are to be of any meaning or enforceability.
The Plight of Sponsor-Employed Trustees
The legacy thinking that has been passed from generation to generation of the practitioners of this industry is that sponsor-employed trustees are full-time employees and thus are already paid by their employers. The principle behind remunerating them, the argument goes, is primarily in order to reimburse their employer for their time away from their official duties on fund business. To this end, as a general rule, sponsor-employed trustees’ remuneration should be paid to the employer, which the employer generally waives out of his generosity. This means that as far as the individual sponsor-employed trustee is concerned, they are not paid for being a trustee, as they are already paid by their employer. Fewer arguments could be more flawed!
The real question to ask is whether the burden of responsibility that trustees carry is at par with the duty of responsibility they have, as employees, to their employers. To not remunerate them is to argue that their paygrade at their employer is at par with their fee-grade at the fund. For most trustees, their decisions at fund level are by far much more important with far reaching consequences than the effect their roles and decisions at their employer have. That, on its own, warrants that they be remunerated.
To bring it into context, our pension fund industry is the size of about a quarter of all the companies at the Zimbabwe Stock Exchange put together. If ever we were to hear that a quarter of all companies at the ZSE are run by only part-time directors who are not paid even a dime, we would certainly lose our sanity. Magically, for centuries on end, nothing has seemed strange about that the retirement fate of millions of employees is determined by part-time decision-makers who are rarely paid even a penny.
We certainly need to reset and recalibrate our recognition and reward system. All trustees need to be paid in order to foster expertise and business-like pension fund management practices across the board. Besides, the sheer scale of pension fund assets, coupled with the attendant economic, political, and administrative risks, places an enormous responsibility on trustees to govern funds wisely – and for that, they should be remunerated, whether independent or sponsor-employed.
All Trustees Are Equal
Independent trustees are generally remunerated, apparently to ensure that expert skills and knowledge are brought into the fund. The point that this argument scaringly misses is that once appointed, all trustees are equal. Classifying them as employer-appointed, member-elected, independent, or by any other measure for that matter, is fueling unnecessary boardroom conflicts by division. All trustees are one with one common agenda – and that is to manage and administer retirement savings on behalf of fund members.
Without being overly side-tracked, the issue of to whom do trustees account deserves more attention. Once appointed, all trustees, employer-appointed, member-elected, and independent altogether, are primarily accountable to members and the regulator. And only secondarily so, to the employer and other stakeholders. The notion that employer-appointed trustees are there to represent the interests of the employer is a fundamental misinterpretation of the principles that govern the operations of the industry.
On appointment, they become a collective with a shared objective of ensuring that the decisions they make are in the best interest of members. While they may have an allegiance to the constituency that appointed them, it is worthy emphasizing that their role and responsibilities should be in the best interest of the members of the fund and not their appointing constituencies.
But so much for that for now – we will certainly return to it in one of our future submissions.
The argument for treating trustees differently goes further to point out that independent trustees ensure that strategic fund decisions are made with the highest level of industry-related expertise and knowledge. Of course, that is never in dispute. However, for the heavy advice-consuming body that trustees are, the core skill required is their individual and collective capacity to competently evaluate the quality of advice they receive from their advisers and service providers. Any industry-specialist skill over and above that is only but an added advantage. All trustees carry the same weighty yoke of making decisions in very difficult and challenging discussions on which the retirement fate of their members lie. For that, they need to be treated equally – of course, taking into account the additional specialist skills that each one of them brings to the table.
The remuneration principles for fund trustees and company non-executive directors are similar, in that both are expected to act independently, and are responsible for the direction and strategy of the entity, ensuring that fund members’ interests are best served, and good corporate governance upheld. This makes no distinction between employer-appointed, member-elected, or independent trustees. There is only one primary constituency that all trustees serve – the members.
As we seek solutions to addressing all the challenges we are facing as an industry, maybe we need to start by addressing one of the very fundamental ones first – that is, trustee remuneration. Get that right, and some of the other challenges will, maybe not necessarily disappear, but subside at the very least. While we have not attempted to attend to the “how much” part of the discussion, we believe trustee remuneration, at the right scales, will not only attract the right skills, competency, and commitment, but will also strengthen the authority of members over their trustees to demand more accountability.
Our monthly publication is aimed at inviting conversations from like-minded individuals with a view to engaging in forward-thinking-led discussions on how we can collectively improve the state of our industry.