New funds offer a wider range of investment choice
In January 1998, Ireland’s leading financial services company Allied Irish Banks (AIB) started to offer defined contribution arrangements to all its new entrants. In the fourth quarter of 2003, AIB undertook a structural review of its DC arrangements.
Later in 2003 and into 2004, the trustees of the DC arrangements in AIB in Ireland and the UK introduced new fund options to members of the DC zschemes.
This was part of the overall review of the DC arrangements where AIB (the sponsor) and the trustees were seeking greater member participation, increased member education and communication, an expansion of investment options and the introduction of a formal trustee governance.
The trustee boards in the UK and Ireland engaged investment consultants to assist with reviewing member investment options. The review concluded that the investment options should be widened to include passively managed and fund-of-fund products. This resulted in four additional funds being introduced in Ireland and four new funds being introduced in the UK as a first step into open architecture.
The new UK trustee board and the Irish trustee board have documented governance plans, including communications, administration, funding and accounting, and trusteeship.
The trustees believe that good governance of a pension scheme requires that the trustee board equip itself with the appropriate tools, information, advice and guidelines for responsible management of the pension scheme and its assets.
Trustees must act prudently particularly when dealing with the investment of scheme assets and have a duty to take expert advice where they do not themselves have the necessary expertise. Some aspects of these duties have been codified into statute and regulation in the UK. The absence of similar regulation in Ireland is of little consequence as the AIB board seeks to achieve the standard of best practice operated in both jurisdictions.
The recommendations emanating from the Myners’ report on institutional investment in the UK are not legal requirements but they can act as a guide to best practice. According to the DC trustee boards in AIB, a review of governance might include implementing certain aspects of Myners’ principles.
These could cover a review of the collective skillset of each of the trustee boards, consideration of the structure of investment sub-committees and increased transparency (by issuing a formal statement of investment principles to members), providing members with sufficient information and adopting a formal procedure for assessment and performance review of managers and advisers.
Where a default option is offered to members, consideration was given to Myners’ recommendation that trustees set formal investment objectives. An express commitment to improving scheme governance helps to enhance the reputation for the DC schemes.
Investment returns are of fundamental importance to DC benefit provision. That is why the trustee boards, in line with Myners’ principles, also should appoint a person with asset management experience to each of the boards, invite external advisers to trustee meetings to supplement skill gaps and conduct a formal governance review taking into account these recommendations. As part of AIB’s review of governance, it was decided that a separate trust and trustee board should be established in the case of the UK scheme. In addition, as part of the overall governance, it was decided that the chairman of both trustee boards should be independent.
Highlights and achievements
AIB introduced the total equity fund (a fund of funds), the passively managed fund, the managed fund (also a fund of funds) and the fixed interest fund in Ireland in April 2004.
The scheme has also added to its fund choices in the UK and introduced actively managed, passively managed, total equity, fixed interest and cash funds.
Once the new funds were selected and established in consultation with the respective investment consultants, the next phase was to roll out the new funds to the existing members.
This took the form of a three-pronged approach via intranet, post (containing a new members information pack) and seminars conducted by a member of the Group Pensions Department and the actuary to the scheme. The new fund options were well received by members and both these funds and existing funds have been performing well since their rollout.