How can delegating decision making help trustees achieve a better outcome for their schemes?

There are four areas in which trustees achieve a clear benefit by working on an implemented consulting basis:

• Governance: By delegating investment decision-making to experts, the trustees strengthen the governance model of their scheme.
  
  
• Focus: The delegation of implementation issues – including manager selection – means that trustees can refocus their available governance on the key driver of risk and return for the scheme: the overall strategic asset allocation.
  
  
• Efficiency: Execution post-decision can be delayed for many reasons – contract negotiations, fee discussions, operational and compliance due diligence, etc. Delegation of decision making to a firm with implementation expertise reduces the opportunity cost of this inefficiency.
  
  
• Cost: Implemented consulting charged on a single, asset-based fee, introduces greater cost certainty to trustees.

What are the potential pitfalls of delegating decision making? How can these be overcome?

There are two pitfalls to avoid. The first is avoided by ensuring that you work in partnership with an organisation with the breadth and depth of intellectual capital required across the full range of investment functions that a client may wish to delegate – e.g. investment strategy, dynamic risk management, fund structure, manager selection and continuous monitoring capability. It is important to make sure you delegate to a firm that has a rigorous understanding of strategic asset allocation as well as a strong manager research capability. The second pitfall to avoid is relying only on delegation of decision-making. Decisions are only of use if they can also be executed or implemented. It is important to work with a firm that has the operational and legal infrastructure to execute decisions.

How should a trustee assess what option is right for them?

The key consideration here is governance, and to look at both sides of the balance sheet. How much governance is required to support a client’s investment programme, and how much governance is available?

Our belief is that clients should close any gap, or shortfall in governance, by strengthening the governance model rather than cutting back on the investment programme. Clearly, one way of closing the governance shortfall is to delegate on an implemented consulting basis. Our clients can access Mercer research in a range of ways, and we find that governance is key to deciding the right option for each client.

How should trustees monitor/assess managers holding delegated decision making responsibilities?

We believe that trustees should monitor and assess all of their advisers, including their investment consultants. One of the great advantages of working with an implemented consulting structure is that this facilitates the monitoring and assessment of the consultant. Our work is more measurable and more transparent, and we assume greater accountability and ownership. We can no longer hide behind decisions taken by others.