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

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  • CLARK, GORDON L.
  • CAERLEWY-SMITH, EMIKO
  • MARSHALL, JOHN C.

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.

Suggested Citation

  • Clark, Gordon L. & Caerlewy-Smith, Emiko & Marshall, John C., 2006. "Pension fund trustee competence: decision making in problems relevant to investment practice," Journal of Pension Economics and Finance, Cambridge University Press, vol. 5(1), pages 91-110, March.
    • Handle: RePEc:cup:jpenef:v:5:y:2006:i:01:p:91-110_00
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    Citations

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    Cited by:

    1. Lisa A. Hagerman & Tessa Hebb & Anna Steiger, 2008. "The role of community partners in urban investments," Public and Community Affairs Discussion Papers 2008-02, Federal Reserve Bank of Boston.
    2. Gordon L. Clark, 2014. "Roepke Lecture in Economic Geography—Financial Literacy in Context," Economic Geography, Clark University, vol. 90(1), pages 1-23, January.
    3. Gordon L. Clark, 2016. "The Components of Talent: Company Size and Financial Centres in the European Investment Management Industry," Regional Studies, Taylor & Francis Journals, vol. 50(1), pages 168-181, January.
    4. Clark, Gordon L. & Fiaschetti, Maurizio & Tufano, Peter & Viehs, Michael, 2018. "Playing with your future: Who gambles in defined-contribution pension plans?," International Review of Financial Analysis, Elsevier, vol. 60(C), pages 213-225.
    5. Manuel Ammann & Christian Ehmann, 2017. "Is Governance Related to Investment Performance and Asset Allocation? Empirical Evidence from Swiss Pension Funds," Swiss Journal of Economics and Statistics, Springer;Swiss Society of Economics and Statistics, vol. 153(3), pages 293-339, July.
    6. Jim Stewart & Bridget McNally, 2014. "Trustees and pension schemes in Ireland," Journal of Financial Regulation and Compliance, Emerald Group Publishing Limited, vol. 22(1), pages 2-14, February.
    7. Ashby H B Monk, 2009. "The Geography of Pension Liabilities and Fund Governance in the United States," Environment and Planning A, , vol. 41(4), pages 859-878, April.
    8. Bruder, Benjamin & Roncalli, Thierry, 2012. "Managing risk exposures using the risk budgeting approach," MPRA Paper 37246, University Library of Munich, Germany.
    9. Gordon L. Clark, 2015. "The geography of the European Central Bank: form, functions and legitimacy," Journal of Economic Geography, Oxford University Press, vol. 15(5), pages 855-881.
    10. Ashby H. B. Monk, 2009. "Pension Buyouts: What Can We Learn From The UK Experience?," Working Papers, Center for Retirement Research at Boston College wp2009-19, Center for Retirement Research, revised Sep 2009.
    11. Jin Sug Yang & Anna Bedford & Martin Bugeja, 2023. "Director expertise and co‐option in industry superannuation funds?," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(S1), pages 1249-1283, April.
    12. van Dalen, H.P. & Henkens, K. & Koedijk, C.G. & Slager, A.M.H., 2010. "Decision Making in the Pension Fund Board Room : An Experiment with Dutch Pension Fund Trustees," Discussion Paper 2010-18, Tilburg University, Center for Economic Research.
    13. Gordon L. Clark & Emiko Caerlewy‐Smith & John C. Marshall, 2009. "Solutions to the Asset Allocation Problem by Informed Respondents: The Significance of the Size‐of‐Bet and the 1/N Heuristic," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 12(2), pages 251-271, September.
    14. John A. Dove & Courtney A. Collins & Daniel J. Smith, 2018. "The impact of public pension board of trustee composition on state bond ratings," Economics of Governance, Springer, vol. 19(1), pages 51-73, February.
    15. Gordon L Clark & Roger Urwin, 2008. "Best-practice pension fund governance," Journal of Asset Management, Palgrave Macmillan, vol. 9(1), pages 2-21, May.
    16. Bovenberg, A.L. & Koijen, R.S.J. & Nijman, T.E. & Teulings, C.N., 2007. "Saving and investing over the life cycle and the role of collective pension funds," Other publications TiSEM 6eab1341-eda5-4f21-8c06-8, Tilburg University, School of Economics and Management.

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