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Pension fund trustee competence: decision making in problems relevant to investment practice

Published online by Cambridge University Press:  08 February 2006

GORDON L. CLARK
Affiliation:
Oxford University Centre for the Environment, South Parks Road, Oxford OX1 3QY, and the Labor and Worklife Program, Harvard Law School, Harvard University, Cambridge MA 02138, USA (e-mail: [email protected])
EMIKO CAERLEWY-SMITH
Affiliation:
Oxford University Centre for the Environment, South Parks Road, Oxford OX1 3QY
JOHN C. MARSHALL
Affiliation:
Department of Clinical Neurology, Radcliffe Infirmary, University of Oxford, Woodstock Rd., Oxford OX2 6HE, UK

Abstract

Government-sponsored inquiries into trustee competence, and legislation regarding the protocols and practice of trustee decision making, have raised questions about the competence of trustees to make investment decisions consistent with the long-term interest of defined benefit pension plan beneficiaries. In this paper, we report the results of an analysis of trustee competence in solving problems relevant to their investment responsibilities. Based upon a set of widely recognized problems drawn from the psychology literature, we assess their discount functions, their willingness to risk their own money and others' money, their appreciation of probability, and their use of evidence to solve problems. For comparison, where appropriate we report the results of the same testing regime applied to a group of Oxford undergraduates. Our goals are fourfold: first, to demonstrate the nature of trustee competence in decision making; second, to demonstrate the range of trustee responses to problems relevant to investment; third, to assess trustees' risk appetites in relation to their own and others' money; and fourth, to draw implications from these results for the governance of trustee boards and their relationships with advisers and service providers. It is shown that trustee competence is surprisingly heterogeneous, and the lack of common approaches to problems relevant to investment practice has significant implications for fund governance.

Type
Issues and Policy
Copyright
2006 Cambridge University Press

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Footnotes

Support for this paper was provided by the National Association of Pension Funds (NAPF). We would like to thank Christine Farnish, David Gould, and Geoff Lindey for their interest in the project. Helpful comments on previous drafts were made by April Alexander, Keith Ambachtsheer, John Evans, Simon Ford, Michael Orszag, and members of the NAPF Benefits and Investment Councils. We also benefited from the comments of participants at the NAPF Investment Conference (2005), the FT-NAPF Trustee Conference (2005), and the ICPM Rotman School of Management (University of Toronto) conference (2005) on investment beliefs. Amy Dickman provided valuable assistance in coding and analysing the data and Joshua Forgotson edited a previous version of this paper. The results and interpretations reported are the sole responsibility of the authors; none of the above should be held to account for any errors, omissions, or opinions expressed herein.