The duty to manage third party money requires a remarkably high degree of care, caution, and diligence. Pension fund service providers are expected to secure members’ retirement savings under their custody with utmost regard.
Service providers need to clearly demonstrate that they are putting members’ interests ahead of their own, least so, those of their shareholders. Needless to say, service providers are bound, both legally and ethically, to act in their clients’ best interests. In taking custody of members’ contributions, over and above the legal contractual agreements, there is a social contract in which the service providers are held to higher standards of care and regard of the security of members’ interests than that they would ordinarily exercise over their own money.
Trustworthiness is the required foundation based on which any relationship is built, and on which it can stand over very long periods of time. It is the cornerstone that ensures the relationship withstands short term challenges along the way. Pension fund management firms must demonstrate to be leading conversations with trust. Trust is the currency that needs to be exchanged first before fiat money and technical expertise are traded. Service providers are duty bound to evince a commitment to preserve good faith and trust.
Trust is earned, and consequently can only be placed to the extent the industry has earned it. A trustworthy firm is one where members can place their trust and rest assured that the trust will not be betrayed. Pension fund management is a trust-based service and there should never be a feeling that trust is in short supply in any engagements between the members and those in the retirement savings value chain.
Trustworthiness demands responsibleness and accountability. They are both pre-required traits of any and every player in the industry. Every firm in the industry must make a pledge and demonstrate a willingness and ability to honour its commitment of unconditional answerability to members. While members might not necessarily be confronting the industry openly and loudly, they certainly have questions that they are living with. Is this industry dependable? To what extent can I continue to rely on its commitment to deliver a decent retirement for me. How credible is it and its players? What does the experience of those who have retired before me tell me about this industry?
Just as trustworthiness presupposes responsibleness, accountability presupposes transparency. Both of these should be demonstrably embedded in the industry’s culture. If members, as investors, are to be comfortable withthe depth of accountability, they need to be privy to all the material information about the firms in the industry and their operations. In the digital era, systems and processes of the key players should be such that it is effortless for members to get all the information they need about, not only what and how their contributions are invested, but also on why and when they were deployed into those investments. The industry needs to facilitate the nurturing of a deep culture of members’ engagement with their retirement savings.
Information disseminated should always meet the basic requirements of credibility if the industry is to pass the test of transparency. Dissemination of all material information should be timely, accurate, comprehensible,complete, and precise.
There is, of course, a fine line that distinguishes between providing complete information to members on the one hand and making a deliberate attempt to overload members with information on the other. No doubt, the industry must be able to continuously demonstrate that the information it disseminates is precise enough not to confuse members with redundant information while they lose the more important facts in the detail. At the very core, members simply need to know how well their contributions are securing them a decent income in retirement.
With a higher level of transparency, a higher degree of engagement can be achieved, and with that, members can be expected to better prepare themselves for their preferred lifestyle in retirement. On the part of the industry, not only is transparency an effective tool for ensuring accountability, it also promotes a culture of actively preventing negligence and unmonitored outright incompetence. Where staff knows they are being watched, or that they will need to report every transgression or avoidable failures, they are bound to act with a lot more alertness and focus.
Truthfulness is just as great a virtue in business as it is in social relationships. For the pension fund industry, with its product intangibility, it absolutely makes it such a critical requirement.
There is also information asymmetry in favour of the industry, making it incumbent upon the players in the value chain to truthfully disclose all material information. Any undertaking to truthfully disclose all relevant material information should be followed by a strict verification mechanism that substantiates the willingness and ability of firms to disclose such information.
The level of complexity of investment products coming to the market especially now, just makes it also a particularly important requirement that the industry be upfront with the truth about features of the investments into which it is investing members’ contributions. Of course, this is not to say that members should totally abdicate this vital role to the industry alone. They should also intentionally and deliberately seek information about how their contributions are being invested. They generally have an intimate relationship with their other investments; houses, farms, cattle, and many others – retirement savings should be no exception.
Firms must embody a stature of honest, genuineness, and sincerity. Undeniably, truthfulness goes way beyond just being honesty. While being honest means not telling lies, being truthful means actively making known all the full truth of a matter. A firm should demonstrate that it can be counted onto tell the truth all the time no matter how difficult or uncomfortable that could be. Truthfulness is a sign that the firm operates with an open mind and is prepared to learn from its mistakes – a very much required virtue in a field where trust is really all there is to rely on.
Stewardship, in the pension fund industry, is an ethic that embodies the careful, considered, and responsible management of members’ retirement savings. It is the duty to allocate members’ contributions to good quality investments that are secure and with potential to generate returns that maximise the probability of a comfortable retirement. It can further be defined as the succinct expression of the duty of care of members’ retirement savings, and it implies an undertaking to do the right thing beyond that for which you are immediately rewarded. It speaks to an alignment of interests between those of the service providers and those of the members.
Taking charge of members’ retirement savings, their only investment in the majority of instances, demands a special level of dedication, commitment, and assurance that only investments that protect and advance the true interests of members shall be pursued. That degree of assurance should be easily evident through a governance framework that clearly treats members’ savings as sacrosanct. This requirement goes beyond simply investing according to a common approach.
In assuming custodianship of members’ retirement savings, the industry is pledging to safeguard and uphold the financial interests of members with all that is within its collective competence and expertise – consistent with what members have been made to believe the industry has. The industry needs to be seen to be living that pledge.
Three common misdeeds of the pension fund management industry, in markets where they have been prevalent, are mis-selling, misrepresentation, and non-disclosure. The challenge of ensuring that what they are investing into, on behalf of members, is not being deliberately misrepresented rests with the boards of trustees. However, for all else that trustees need to keep an eye on, the industry should not behave in such a way that it creates this unnecessary extra burden on the trustees of monitoring it.
Every investment decision is a risk management decision. Any strategy to grow members retirement wealth starts with protecting that which has already been built. The risks asset management firms choose to take, and how much of each they gain exposure to, and to what extent the risks are rewarded, ultimately determines the returns that members get. While, admittedly, too much risk aversion is not necessarily in the best interest of members, uncontrolled or unrewarded risk exposure is by far worse. The duty of stewardship presupposes that the pension fund industry takes on only well-rewarded risks and apply risk management techniques to minimize the chances of capital loss and underperformance.
A clear display of the understanding of the duty of stewardship by the industry should be insisted on. To adequately respond to that, the industry needs to ensure that the core principles of stewardship are ingrained into its practices and are lived as a culture.
Integrity is doing what is right even when no one is watching. It is the practice of showing a consistent and uncompromising adherence to strong ethical principles and values. Integrity is the act of an individual, or a group of individuals, to consistently seek and pursue morally meaningful objectives in their decision-making processes. Psychologists and philosophers assert that integrity and the ability to attach moral meaning to actions is what distinguishes humans from other animals. Integrity is thus, a preserve of only the human race.
The struggle between doing the right thing and serving oneself interest has always been prevalent in human history. It is a battle of, for whose ultimate benefit should resources be put where those that have the right to benefit do not have control over the resources and those that have control are also self-interested. There would be only a few other sectors where the challenge could be more pronounced than in the investment of savings, retirement or otherwise, where the investment firms have total discretion over how the wealth of members is managed. Integrity is going beyond what is legally binding and doing what is morally right.
The values of integrity cannot just exist in the marketing materials, corporate profiles, and taglines of firms. Instead, trustees need to interrogate service providers on what it means to them to claim such virtues. Pension funds need to thoroughly establish what such claims preclude the service providers from doing, but more importantly, what it forces them to do. How that is measured and to what extent it does flow within the culture of an individual firm is critical.
Absence of integrity, or just the perception of its absence, is directly costly for members as it demands a magnified and increased frequency of monitoring. Indirectly, it creates an unhealthy union between members and the industry.
Ethics and Morals
Pension fund management firms face the same tension between the profession and the business; Should profits dominate the standards of practice, and should business success be a consequence of serving the interests of clients? There is a real threat of a prolonged dominance of the business over the profession. Firms should be able to consistently show ac ulture of understanding that they earn their profits by serving the needs of members.
Important to emphasize here that regulation alone will not provide foolproof protection to members, it could never be designed to achieve that. There is simply no amount of regulation capable of turning a morally bankrupt service provider into a good corporate citizen. Evidence of an ingrained ethical culture gives assurance to members that when key decision makers are faced with an ambiguous choice or option, they will lean more on what is morally right and ethically correct.
Ideals of Fairness
Fairness starts with honesty. A pension fund management firm should be able to show that it has wholeheartedly applied its minds in innovating and developing services and products that it sincerely can claim to be membercentric. In an ideal world, a firm would be honest, first to itself, and secondly to its clients about its expertise and capabilities. It would only avail services and products in disciplines in which it has adequate capacity, resources, and expertise to deliver competitive results over meaningful periods. This is not always the case, and the real world is not that flat – most firms are, at the very core, in the business of just selling services and products, occasionally providing a real solution here and there.
The ideals of fairness would not be adequately embraced if they were only outward looking without ensuring that internally the system encourages staff to raise issues, without any fear of victimisation, on practices that are likely to be unfair to members or could easily be perceived as unfair.
“Judge not, and you will not be judged,” Luke 6:37. We have not made any attempt here to judge the industry. Ours has simply been to draw attention and for each of the players in the industry to self-introspect and gauge how much work they need to put in if they are to live by the ideals of what is in the best interests of members.
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.