The Seven Habits of an Effective Board

Andrew Davison6 September 2011

An effective board needs to:

~Members want to ... and need to ... retire with the finances to maintain their standard of living

~That is why the fund exists~Focus everything you do on delivering on that

objective~Always ask “does this enhance members’

retirement benefits?”~If not, why are you doing it?

(1) Focus on outcomes

(1) Focus on outcomes

The Pensions Regulator in the UK highlighted 6 key elements for achieving good outcomes:~appropriate decisions with regards pension contributions~appropriate investment decisions~efficient and effective administration ~protection of scheme assets~value for money~appropriate decisions on converting pension savings into a retirement income

“You got to be careful if you don't know where you're going,

because you might not get there.”

Yogi Berra

Current Share of Fund (SOF)

0%

10%

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40%

50%

60%

70%

80%

90%

100%

Average member

Target of 70%

Base assumptions:Return of CPI + 4% p.a.NRA: 63Contribution: 10% of salary

Understanding the impact of decisions

Current Share of Fund (SOF)

Future contributions (FC)

0%

10%

20%

30%

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50%

60%

70%

80%

90%

100%

Average member

Target of 70%

Base assumptions:Return of CPI + 4% p.a.NRA: 63Contribution: 10% of salary

Understanding the impact of decisions

Current Share of Fund (SOF)

Future contributions (FC)

SOF - extra 1% p.a.FC - extra 1% p.a.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Average member

Target of 70%

Base assumptions:Return of CPI + 4% p.a.NRA: 63Contribution: 10% of salary

Understanding the impact of decisions

Current Share of Fund (SOF)

Future contributions (FC)

SOF - extra 1% p.a.FC - extra 1% p.a.

SOF - NRA 2 yrs laterFC - NRA 2 yrs later

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Average member

Target of 70%

Base assumptions:Return of CPI + 4% p.a.NRA: 63Contribution: 10% of salary

Understanding the impact of decisions

Current Share of Fund (SOF)

Future contributions (FC)

SOF - extra 1% p.a.FC - extra 1% p.a.

SOF - NRA 2 yrs laterFC - NRA 2 yrs later SOF - extra 2% contrib.

FC - extra 2% contrib.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Average member

Target of 70%

Base assumptions:Return of CPI + 4% p.a.NRA: 63Contribution: 10% of salary

Understanding the impact of decisions

Helping members to understand outcomes

Helping members to understand outcomes

“The two most powerful warriors are patience and time.” Leo Nikolayevich Tolstoy

But patience isn’t easy

~modern life about instant gratification

~lack of patience

~need returns immediately

~unlike weight gain … compounding takes time

Compounding needs time

22,049 23,173 24,344 25,561

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Oct-8

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Feb-8

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Jun-8

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Base portfolio Base + 1% p.a. Base + 2% p.a. Base + 3% p.a.

Compounding needs time

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1,543,545

2,048,301

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500,000

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know the time for patience

Know the time for patience

and the time for action

and, importantly, don’t confuse the two

(2) Be patient

(3) Be brave

~growth above inflation~communicate the danger of ‘waiting out’

periods of volatility in cash ~reiterate at every opportunity~encourage risk taking by members with long

time horizons ... don’t be afraid, it’s your duty

Understanding risk …but not running away from it

-20%

-10%

0%

10%

20%

30%

40%

50%

1 year 2 years 3 years 4 years 5 years 7 years 10 years 15 years 20 years 30 years

Understanding risk …but not running away from it

-20%

-10%

0%

10%

20%

30%

40%

50%

1 year 2 years 3 years 4 years 5 years 7 years 10 years 15 years 20 years 30 years

Understanding risk …but not running away from it

-20%

-10%

0%

10%

20%

30%

40%

50%

1 year 2 years 3 years 4 years 5 years 7 years 10 years 15 years 20 years 30 years-20%

-10%

0%

10%

20%

30%

40%

50%

1 year 2 years 3 years 4 years 5 years 7 years 10 years 15 years 20 years 30 years

A conservative portfolio will give you better downside protection over the short-term but you miss out on the opportunity to achieve higher returns with similar downside risk over the long-term in a higher risk portfolio

Be brave, take risk

0%

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100%

0% 1% 2% 3% 4% 5% 6% 7% 8%

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Real return per annum

Portfolio 30% Portfolio 50% Portfolio 70% Cash

Based on historical index returns over 41 years from 1970 to 2010

(4) Be diligent, dedicated, organised

Be diligent, dedicated, organised

~Your fund is like a business, it requires ...~time~focus~a clear strategy~your dedication, time and skill

or else it will not be successful

~If the fund contained just your money how would you run it?

“An investment in knowledge pays the best interest.”Benjamin Franklin

(5) The benefits of simplicity

~ the environment is already complex~ adding complexity ...

~ makes it difficult to manage~ makes it difficult to evaluate and monitor~ adds cost~ takes up time

~ members don’t understand

SO ... simplify wherever possible!

“Things should be as simple as possible, but not

simpler.”Albert Einstein

(6) Question?

~ One of your most common questions should be “WHY?”~ WHY is our contribution x%?~ WHY is our asset manager showing us that graph?~ WHY is this report useful?~ WHY is our asset manager telling us about bonds in

Greece?~ WHY do I need to see our asset manager’s top 10

holdings?~ WHY is our consultant recommending XYZ asset

manager?~ WHY are our members not retiring with enough money?~ WHY are we paying so much for risk benefits?~ WHY are we interested in a passive fund right now? ~ WHY does our agreement state that?

(7) Be wary of compromise

~Diversity in a board of trustees is healthy but ...

~Compromise often leads to inappropriate decisions

~Examples:~ Two multi managers – over diversification – 9 local

equity managers~ 50:50 split between multi manager and single

active manager – liked both presentations~ Three money market portfolios – couldn’t decide

To conclude

~An effective board provides the ideal environment for the board itself, and the fund’s members, to make excellent decisions that will give them the highest probability of accumulating sufficient assets to maintain their standard of living in retirement

~You can have 7 habits ... or 2 habits ... or 20 habits ... as long as you focus on this