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What Endowment and Foundation Trustees can learn from the new workplace savings scheme



Growing good governance: What might Endowment and Foundation Trustees learn from the new Workplace Savings Scheme regime?


How good investment governance is evolving


In Mercer’s 2018 Endowments and Foundations Survey, we noted that superannuation scheme trustees were required to adjust their governance practices in response to the Financial Markets Conduct Act 2013, and that there might be some lessons for Endowments and Foundations (“E&F”) trustees. In this article, we explore three key investment governance implications which we believe E&F trustees could benefit from considering:


1.     The Licensed Independent Trustee

2.     Statement of Investment Policy and Objectives (SIPO) Guidance

3.     Compliance calendar and work-plan

1.     Licensed Independent Trustee

All workplace savings schemes must now have a Licensed Independent Trustee (LIT) on the Board. LIT’s are licensed by the Financial Markets Authority (FMA) and have a number of obligations under legislation, including acting as a ‘whistle blower’ if they see something untoward.


While workplace savings schemes have a different purpose to E&Fs, there are some similarities including the potential for limited governance or investment experience around the Board table. Some E&F Boards are comprised of people with a passion for the goals of the E&F – but little know-how when it comes to governance practices or investment management.


In this context, the LIT becomes a governance “expert”, somewhat akin to a professional director. The licensing process demands relevant experience and skills and ongoing professional development. What’s more, because most LITs have multiple appointments, they encounter similar challenges and can share learnings around their Boards, lifting the standard of governance in a virtuous circle.


In a similar fashion, we have observed some E&Fs appoint an “investment expert” to their Board or Investment Committee. They are not voting members, nor are they there to make investment decisions or provide investment advice. The focus is on helping Boards improve their investment governance.

Not all Boards are comfortable admitting they may lack certain skillsets, but strong Boards recognise where they may have gaps.  If the trustee appointment process does not allow them to fill these gaps directly, an independent investment expert might be worth considering.


We are also observing some Boards delegating more investment functions, such as the appointment of investment managers under a multi-manager approach or even delegation of strategic asset allocation decisions. Under this framework, the Board’s effort changes from making these decisions to monitoring people who are more qualified to make those decisions (although even in this context, an independent investment expert can play a meaningful role).


Questions for E&F Boards and Trustees


  • Is your Board suitably qualified to make the investment decisions it is tasked with?
  • What continuing professional development is your Board undertaking?
  • Would an independent investment expert or greater delegation improve your investment governance arrangements?


2.      Statement of Investment Policy and Objectives guidance


Most E&Fs will already have a Statement of Investment Policy and Objectives (SIPO), as did most workplace savings schemes. However, the FMA set out guidelines for what it expects to find in a SIPO and reviewed each SIPO as part of the workplace savings registration process. Along with other disclosure documents, each scheme’s SIPO must be made available online.


While the Guidance Note targets Managed Investment Schemes, Section 2 sets out the key components the FMA expects to see in a good SIPO, which we believe are universal. In addition to sections on investment objectives, strategy and philosophy, the Note includes 18 possible investment policies addressing areas such as portfolio rebalancing, currency hedging, operational risk and valuation policies.

The Guidance Note can be found here.


Key areas that we have assisted Boards with updating included: investment beliefs; investment implementation (including how this is aligned with the investment beliefs); policies for selecting and reviewing providers; and socially responsible or ethical policies.

We also found a number of workplace savings schemes eliminate detailed investment guidelines that can prove a compliance minefield, particularly where pooled funds are used to implement an investment strategy.


Of course, a SIPO is just one of many formal documents and policies that Workplace Savings Schemes now maintain. Others include a Board Charter, Interest Register, Risk Framework and Register, Complaints Register and Compliance Calendar.


Questions for E&F Boards and Trustees


  • Is your SIPO in a fit state to be disclosed?
  • Does your SIPO contain all the content and policies it should?
  • In particular, does it include Investment Beliefs, a section on implementation, selecting and reviewing providers, and socially responsible policies?


3.         Compliance calendar and work-plan


The new regime imposes a number of compliance demands on trustees of workplace savings schemes. These include lodging regular fund updates, related party certificates and an annual report, as well as monitoring limit breaks (investment breaches) and risk indicators (a measure of an investment fund’s historic risk), and notifying the FMA if certain events occur.


In order to manage the compliance burden (and avoid the rather unpleasant implications of a breach), most workplace savings scheme Boards have established a compliance calendar and work-plan. These have introduced a greater degree of discipline to the investment governance process – and while E&Fs do not have to abide by this regime, we believe E&F investment governance would benefit from the same disciplined approach.


This process has sharpened clarity around what reporting trustees need and when they need it. For instance, trustees have distinguished between monitoring and review. Monitoring is a systematic check that commitments are being kept, rules followed and key indicators measured. Investment monitoring includes compliance checks and performance reporting.


A review is a periodic examination of a process or provider. In the context of investment governance, trustees are reviewing their investment strategy and providers to ensure they remain fit for purpose and the best available.


A good compliance calendar and work-plan will ensure trustees meet their obligations to regularly monitor the activities of the Fund and review the key components of the investment arrangements.


Questions for E&F Boards and Trustees


  • Are you confident your investment portfolio complies with your SIPO?
  • Do you have a disciplined investment work-plan covering the next three years?
  • Have you scheduled reviews of your key providers?


Towards better governance


The new financial markets regime is designed to promote good conduct from all participants, including workplace savings scheme trustees.  Good conduct implies good investment governance, which evidence suggests, means better investment outcomes.


E&F trustees are not bound by the legislation, but they can still benefit from its principles. The idea that better governance will mean more money for mission is a powerful motivation. We believe E&F trustees can ‘look across the aisle’ at their workplace savings counterparts to ensure they are incorporating developments in good investment governance.


"An investment in knowledge pays the best interest." 
- Benjamin Franklin.



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