Investments – the Devil is in the Detail
23rd February, 2016
Whenever a trustee challenges the basis of a legal document such as a contract, terms & conditions or an agreement, the first response from the other side is invariably some variety of “these are market standard”. They may very well be, this is not a misleading statement, however just because they are standard doesn’t make them un-challengable, if you don’t think they are fair to your pension scheme. There is also no guarantee that they cover (or in legal terms, indemnify) the Trustee in the event of material loss over what could be perceived as investment failings.
This is especially important in investment contracts, where the biggest contractual risks lurk.
Many investment agreements will contain bold statements regarding the remit of the fund managers to secure investment growth. This could include permitting investment that goes outside the published aim of the fund. When placing a mandate with a manager trustees expect the manager to invest in a certain way. This is achieved by designing a portfolio to target a certain level of expected return and respective risks. Deviation from this strategy may ultimately increase the risk.
With investment consultants appointed to manage a selection process, trustees have some comfort in buying the due diligence work of this consultant. However, the trustees are unlikely to be covered by the consulting agreement, and ultimately the balance of responsibility for reviewing investment contracts and related attaching documents rest with the trustees.
In our example above, many trustees may think that unreasonable T&C’s would be proved to be just that in the Courts. However, case law is very clear on this point. The trustee is on an equal footing to a customer due to the duty of responsibility expected of the role, they are not retail customers. This includes lay trustee boards. In retail application customers are not expected to delve 500 pages into the small print, a trustee is. Therefore the literal interpretation of any clause, would apply as stated.
Trustees must also understand how performance related fees are measured, and how the output can be transparently assessed. The detail should be understood before appointments are made, as without this, it is very difficult to contrast different offerings. Once again assuming something is right, just because it is standard, will never prompt positive change.
The advice for trustees is to review documents, however painful this may be or have the scheme legal adviser do it for them, if they feel they do not have the requisite skillset. Where contractual negotiations are needed, do so before the business is confirmed as “won”. Managers will be far less likely to negotiate if they have a foot firmly in the door and signatures are on an agreement. Do not assume that just because a clause is apparently unreasonable, that it will not be enforced. Finally, just because you have a small holding, relative to some investors, don’t assume managers will not deal with your concerns before you sign on the dotted line. The trustee should negotiate the most advantageous contractual terms, regardless of fund size. In this context – size doesn’t (or perhaps shouldn’t) matter!