Thinking out of the box
With Terry Faulkner at the helm, the UK’s National Association of Pension Funds has a pension fund professional as chairman. The pensions manager at the Rexam scheme (see page 34) takes up office this month roundly declaring that there is not a ‘pensions crisis’.
“But I do think it could turn into one,” he warns. “Our problem is that we are at the bottom of a big market cycle, which is something many people not experienced before.” This has resulted in a widespread lack of confidence. “The biggest issue we have is he loss of confidence in business leaders, politicians, financial advisers and pension funds,” he says.
“We need to build up this confidence again in pensions,” he maintains. In particular it requires education, especially among the press, who often don’t really understand pensions issues. Clearly, one of the tasks that he sees as central for the NAPF.
But the pensions industry is certainly challenged. On corporate governance which he describes as “spending enough time when you are a shareholder, as when you decide to buy and sell that share.” Myners and the Chancellor Gordon Brown are looking for that involvement, which the NAPF is tackling by strengthening its corporate governance area. “Pension funds should be good citizens on the corporate front,” he says.
Faulkner points to the sustained move away from defined benefit (DB), a debate in which the terms are drawn too narrowly. “There are clearly some organisations that have DB plans, when they shouldn’t . This is the shake out we are seeing.”
His view is that is an area of fluidity, with employ-ers put-ting in place a structure that suits their needs and those of their workforces. So there are those who should be offering DB and aren’t and may move back at some point. “If an employer sets up a scheme, is committed to it and the employees want it, that is a good idea, whatever shape it is, DB, DC or hybrid. There is absolutely nothing wrong with any type of pensions arrangement.” The risks are different in each, and all carry risks, Faulkner emphasises.
He would like to see a much greater variety of approaches to pension provision, with pension plans being offered in as industry wide or multi-employer type groups, perhaps even plans for businesses in certain localities or regions. Some of these could be structured even to provide DB benefits, something smaller companies could not think of doing on their own.
Pension funds should be more proactive in how they offer themselves, as specialist pension providers, different from insurance companies and from mutual fund managers. “Perhaps there are approaches and structures, on the continent or elsewhere that we should see if they could work here.”
On the European front, he is pleased the directive has got through the political machinations, even if it is not as full free and open as he would like. He thinks that it could have been more restrictive with the influence of the insurance lobby. “Luckily this has not been fully reflected in the directive.”
He wonders how intact the ‘prudent person’ approach is in current market conditions. “I believe the rule has served us well, but continental Europeans might not think so with UK funds’ exposure to equities. You can hear them saying ‘Serves you right!’”
Another critical issue facing UK pension funds is precisely that of ‘asset allocation’. Is it just equities and bonds, he asks. Funds and their consultants have to take the Myners lead and be familiar with alternatives. Allocation has to be much more fund specific, Faulkner maintains. “Trustees and their advisers must exercise their freedom to think out of the box.” He believes there will be greater variety in approaches to allocation.
Pension fund freedom is another issue that exercises him. “One of the strengths of UK provision is that there are independent trustee boards taking care of the interests of their members and not some national council looking at what is best for everybody.”
In government circles, there is a dislike of DB plans because they cannot be controlled. “I am convinced that the Chancellor Gordon Brown does not like DB occupational schemes, because he cannot control them. Since pension trustee boards are completely independent and separate from one another, there is no overall body that can say to all pension funds you must only have 10% in equities.”