With the UK market, it’s a question of where to start and how to prioritise those events that have influenced the market. Over the next couple of years, pension funds will have to introduce the international accounting standard FRS 17 which in practice means measuring assets and liabilities by their market value. This may appear of little significance but it will manifest itself on company’s balance sheet where, says Alan Botterill, Towers Perrin’s managing director for Europe says, “the financial management of pension funds and the risk reward ratio is becoming very evident.”
Danny Wilding, a partner at Barnett Waddingham, says FRS 17 will be the final straw for some companies who will decide to wind up their final salary schemes. In the short term this will be a source of work for consultants. Closing DB schemes requires extensive work as does planning a DC scheme. Wilding believes that in the long run there will be less work for the consultants as the DC schemes need less maintenance.
Another issue followed extremely carefully in 2001 was the court case between the Unilever superannuation fund and Merrill Lynch’s Mercury Asset Management. Unilever sued Mercury for taking excessive risk and underperforming. Investment managers feared that a ruling for Unilever would set a precedent and lead to a flurry of similar lawsuits. As it happen the case was settled out of court for a reputed £70m but the point of the trial is that it has brought to the fore the issue of who is ultimately responsible for the running of the pension fund and who should be held liable for underperformance.
Wilding says it will lead both clients and investment managers to ask for clearer definitions of investment risk. It will also, he says, encourage more passive investing but those remaining active will be drawing on their consultant to monitor the levels of risk, the investment guidelines and benchmarks. Following the verdict investment manager SEI commissioned a research company to gather responses from pension fund managers from thirty of the largest UK companies. Although the sample size is far from exhaustive, half said they will be reviewing their own arrangements as a result.
Rather like the Unilever case, so the Myners report will make most UK pension funds take a closer look at their investment strategy. The government has announced another pension fund review for some time around April 2003 and given the import of the last report, so funds will want to be left out during the consultation period. But few will be able to argue they have anything to offer if they have not carried out a study with their consultants to see if they already meet with Myners’ recommendations. Wilding says that many of the larger funds are already undertaking such a task and that most will do so in the next 15 months.
Roger Urwin, Watson Wyatt’s global head of investment consulting, says that of all the European markets the UK is by far the busiest. He says that trustees meeting have of late lasted much longer that previously. “There are so many more issues to deal with and each of those issues seem to be more complicated than before,” he says.
And the prospects for the industry look pretty good for the near future. “There’s a lot of change in the UK industry which means there is a lot greater spend by trustees in the UK industry and inevitable this is going to be a very high growth area for all investment consultants,” says Nick Fitzpatrick, head of investment consulting at Bacon & Woodrow.