Pension board decision-making during challenging times
July 24, 2020
In cooperation with Prof.dr. Alfred Slager of TIAS Business School Tilburg, Martijn Vos, COO Ortec Finance, researched decision-making by Dutch pension fund board members during the Corona outbreak. Pensioen Pro published on the outcomes of this research. It shows that boards are prepared to make difficult choices. “But what if this time is different?”
The Corona crisis period is exceptional in many ways. This is undoubtedly the case for pension fund boards and trustees. They have to make difficult decisions, under much uncertainty, rapidly changing circumstances and new events. All is to be done in order to do the best possible for the participants, as well as within the regulatory framework.
However, pension fund board members are well equipped. After all, in recent years, boards have been professionalized at a rapid pace, and decision-making processes have been vastly improved. It is not the first time pension funds face such circumstances. Many funds were struck hard by the financial crisis in the period 2008-2010. Both pension boards and supervisors have adjusted matters based on these experiences. The Corona crisis is the test to whether all these measures have lead to better decision-making and choices. Now is the ideal time to evaluate and share lessons. Fifty Dutch pension fund executives were asked to participate in a survey of which 20% responded. The full research summary in Dutch is available for download here.
In general, pension fund board members are satisfied with how they have handled this crisis. More than two-thirds of the board members surveyed indicated that they would not change their approach in the next crisis. However, one-third indicated that improvements are possible, especially in decision-making and adaptability. Amongst the questions that stood out were, What exactly do we need to do with those stress scenarios? Only monitoring, or are we actually going to steer and adjust? Three lessons learned stand out:
- The financial crisis was unexpected and severe, but board members are better equipped to deal with the current financial crisis than for example, 10 years ago. The quality of crisis management has increased significantly. Board members should ask themselves in advance: "Is crisis management intended to stay on top of what is happening, to closely monitor, or is it intended to determine which buttons the board are allowed to or should push and why?"
- Crisis plans are paper tigers. Required by regulation some years ago, boards develop a crisis plan, but in practice, find them - due to the regulatory requirements – not so practical. Pension fund board members mostly use it to organize themselves differently, so that they are more decisive, and, can react faster. The crisis plan is not suitable for difficult, substantive choices and "what-if" preparations in crises, as is customary in other sectors. Large and practical steps can be taken here.
- The underlying assumptions - long horizon, rebalancing to earn risk premiums - as a long-term investor appear to be widely shared and applied. Funds may also make other choices to manage the balance sheet, such as funding ratio or risk budget dependent investment policy, with different assumptions. Overall, boards have stuck to their course. They also signal that any difficult choice or assumption should be made or challenged long before a crisis breaks out. When a crisis erupts, a fund no longer has the opportunity to make other choices and must "stick to" the chosen assumptions. It is therefore crucial to understand the main assumptions and choices in your policy and to discuss in advance what happens to those assumptions during a crisis.
In short, for board members, it is consistent but at the same time uncomfortable to follow established policies. This research shows that boards are better prepared than in previous crises and are also prepared to make difficult choices. “But what if this time is different?” This may well be the case. However, (how) are you able to identify game changers in times of crises and uncertainty? Or should a board accept that only when the smoke clears, it makes sense to have such a discussion, and that it may be distracting during the crisis itself? A board should agree on this in advance in order to organize the crisis plan and decision-making in a more effective manner. Follow-up research on this is required.