The name of Paul Myners has been on the lips of pensions professionals in the UK for some months now, and all the more so in the last few weeks since his review of institutional investment practice finally saw the light of day.
When Chancellor of the Exchequer Gordon Brown commissioned the Gartmore chairman’s investigation, he was conscious of both an industry calling for the head of the minimum funding requirement (MFR), and a Prime Minister targeting the pension fund industry as a prime donor for the country’s fledgling entrepreneurs via venture capital funding.
In the first instance Myners has undoubtedly played to the gallery.
Following his recommendation, the government is to scrap MFR. In its place, Myners proposes that pension funds should apply a scheme-specific long-term approach to funding, which he suggests should be based on “transparency and disclosure”.
On an annual basis, plans would be expected to report publicly on the current financial state of the fund and on future funding plans.
So far so good then? Well, not quite. While applause for the loosening of the MFR investment straightjacket was quasi universal in the UK, some argue that Myners could be leaving pension scheme members just a little too exposed to the elements.
Mike Pomery, a partner at consultant Bacon & Woodrow who headed the actuarial profession’s advice to the Department of Social Security, warns of the paradox: “Abolishing the MFR is good news, but we’re very worried that there’s no specific framework to provide protection for scheme members under the new regime.
“ The absence of any definitive guidance about what level of benefit security a scheme should target potentially leaves scheme trustees and members exposed – it’s a dangerous situation.”
Pomery also asks the pertinent question of who carries the can in the event that an employer goes bust with insufficient assets to secure benefits in full.
“ In the extreme this might mean that all schemes will have to target total benefit protection – a much tougher test than the current MFR.”
Cautious words, but wise words nonetheless, when you consider the stakes involved.
Myners’ second task – a wholesale review of the philosophy behind the investment trends of UK schemes – called for the use of a more powerful microscope.
Focusing on the first strand of the UK pension investment chain – the trustees – Myners offers the recommendation that they become ‘familiar’ with the investment issues on which they decide to ensure scheme assets are managed in a “prudent” manner.
Citing a survey of around 200 UK trustees, Myners reveals that 62% possess no investment qualifications, while 69% receive two or fewer days training when they first became trustees.
Forty-nine per cent, he notes, spend three hours or less preparing for investment issues before a meeting and 77% say the pension fund has no in-house professionals to help them in their decision-making.
Consequently, while trustees are legally responsible for pension funds, they are in practice unable to take major decisions or challenge the advice of consultants effectively, due to their lack of expertise, Myners points out.
This lack of professionalism, he adds, has in part led to what he terms the “herd-like” behaviour of pension funds - overly investing according to peer group benchmarks and
ignoring asset classes such as private equity, which may in fact be appropriate to the fund’s objectives.
Increased pension fund sophistication, Myners says, necessitates the drawing up of a set of principles for investment decision making - within which all asset classes should be considered.
Trustees would then be expected to have the necessary skills, information and resources to implement their reasoned choices effectively.
So a passing nod to venture capital, but nothing to write home to Tony Blair about.
Time and responsibility don’t come cheaply though and Myners advises that the ‘lay’ principle of trusteeship can no longer fit the bill.
Trustees, he opines, should be paid for their services – recognising the complexity importance of their work - investing assets, which, he notes, represent upwards of £800bn (e1,276bn) for the pensions of around 12m UK employees.
Somewhat paradoxically perhaps, his suggestions have met with resistance from pension funds and trustees themselves. Questions have been asked over just exactly how much trustees should be paid and whether market values can add anything in the pension fund domain. Yet despite his criticism, Myners stops short of going down the regulation route.
Institutions, he says, will not be ‘required’ to comply with the new investment principles, but will be obliged to say why and where they do not comply, should this be the case.
The threat is there, however.
While the ideal outcome would be for the pensions industry to adopt the principles voluntarily, the Gartmore chief says, he is clear that the government should legislate accordingly should there be no action – with a review posited for two years time.
Myners’ light touch was welcomed by the National Association of Pension Funds (NAPF) with Alan Pickering, NAPF chairman, commenting: “We are delighted that a prescriptive approach is not being recommended and that the temptation to pursue a box ticking mentality for the investment process has been rejected. There is no viable alternative to a thoughtful and informed approach to pension fund investment.”
But not everyone agrees that Myners has gone far enough, as Mark Duke, principal at consultant Towers Perrin argues: “ Mr Myners may have found the subjects of governance and management far more complex than he anticipated. Perhaps the lack of substance and practical content in the review is indicative of him finding the topic too hard.”
Certainly, Myners himself argues that much of what he advocates is basic commonsense. But when did commonsense always triumph over folly?
The next link in the pensions chain - the role of consultants - does not escape the gaze of Myners.
On the whole though the advisers come out unblemished, with the report arguing that the low business margins in consultancy are in themselves unhealthy for the pensions industry.
“ The result, despite these firms’ best efforts – to which I pay tribute – is a narrow range of expertise and little room for specialisation,” says Myners.
Empathy is one thing, but the report’s recommendation that pension funds split actuarial and investment contracts to bring more players into the country’s restricted advisory market, must have made consultants wince.
Perhaps their only solace was that Myners did not blunt his sword against his own. Significantly, the Gartmore chairman suggested that investment managers should include so called ‘soft commissions’ such as outsourced broker research in their fees to pension funds.
Myners argues that broking commissions made by asset managers are not subject to sufficient examination, but still passed on regardless as a charge to the client.
“This is a new proposal that has never been trailed before. It is a serious cost, which is not exposed to as much scrutiny as it should be,” he comments.
He also criticises the reluctance of investment managers to become involved in the companies they invest in-arguing that there should be a clearer duty for fund managers to act in shareholders’ interests.
“I don’t accept that fund managers do actually challenge companies about their strategies. “There is a need for engagement.”
And he takes a swipe at the over-precise use of index benchmarks by managers, which he says cause “unnecessary distortions” and which he adds do not always capture the risk/return requirements of pension funds.
So, Myners leaves the UK pensions industry with much to talk about - and for that it is welcome.
The criticism might be that it is a report that gets tongues wagging, but lacks teeth.