Communication can be a challenge for pension plan sponsors and trustees when trying to remain focused on the long term, said Matthew Leatherman, director at FCLTGlobal, during a webinar hosted by the Canadian Investment Review on Friday.
“Trustee directors need risk information in order to fully govern and oversee their organization in a long-term manner. The way the information often is communicated though involves risk professionals presenting at a board meeting to the trustee directors and those presentations can be very powerful, very technical, but sometimes difficult to understand.”
FCLTGlobal’s research has found individuals don’t want to admit when they don’t understand something — a behavioural tendency known as self-preservation bias. And when people don’t ask questions, it can lead to different expectations. “When risk actually materializes, surprises happen and then reaction rather than planning and action. And that reaction is a source of short-term behaviour.”
In response, FCLTGlobal developed a toolkit for investors. One of its tools is a conversation guide for trustee directors to use for risk oversight. When trustees don’t want to admit they don’t understand investment risk, a risk oversight session won’t elicit many questions, Leatherman said. “It elicits a lot of head nods and congratulations and encouragement about the professionalism and detail that the risk team offered, but oftentimes not a level of integration that’s needed for the trustee directors to act on that information in the course of their long-term governance of the fund.”
When trustees can ask questions and point to a third-party guide, they will feel more comfortable, he noted. “We’ve provided that conversation guide as a nudge to enable them to take control and ask the questions that help them oversee and govern the organization in a long-term way.”
In addition, the FCLTGlobal toolkit contains a checklist for risk professionals about how to organize information they communicate to their oversight and management bodies. “Oftentimes, we get the feedback that this is very vanilla, it’s not particularly interesting,” he added. “And then I have the chance to turn around and ask the question: ‘Do you do it?’ And the answer so far has uniformly been no.”
During the webinar, Max Giolitti, chief risk officer at Verus Investments, said his trick when presenting complicated data to boards isn’t just throwing a whole bunch of numbers at them, but rather only presenting what’s important to them. “You can’t go there with a phonebook of information.”
He recommended that boards and trustees demand to have their portfolio explained in a way they understand completely. He pointed to his past experience working at the Alaska Permanent Fund Corp., which rolled out many risk measures during a previous crisis. “We spent a lot of time with trustees [in] one-on-ones [and] board meetings and then it became intuitive.”
If something seems too complicated to understand, it just means the communicator isn’t doing their job properly, he added. “I fear failing at communicating more than I fear a bad model.”
In addition to communication with boards, communication with plan members is key, said Hugh O’Reilly, executive in residence at the Global Risk Institute, during the webinar. “I think, especially for pension funds, there’s got to be a balance between reassuring members to tell them that the sky isn’t falling immediately, because it likely isn’t in the way that most Canadian funds are run, but I think there’s a real need to avoid sugar-coating.”
If a pension plan sponsor needs to make tough decisions and hasn’t laid the groundwork, it could come back to bite them, he added. Further, he advised plan sponsors to start managing the expectations of their plan members going forward.
For example, he suggested they consider the effect of the coronavirus crisis on future discount rates, which are likely to go down, O’Reilly noted. “So instead of going, ‘Oh my God’ at the end of the year or early next year, get on top of that now. Start thinking about what that means in terms of the funded position of your plan and how you communicate that.”