Where to find potential returns?
A number of investment-related issues arose at the autumn conference of the UK’s National Association of Pension Funds (NAPF), although it must be said that investment was not the conference’s primary concern.
The possibility that members of defined benefit (DB) schemes would be excluded from simultaneously contributing to the stakeholder pensions was vexing the NAPF’s chairman, Alan Pickering. This issue of ‘parallel membership’ is high on the NAPF’s agenda at the moment, a fact no doubt duly noted by pensions minister Jeff Rooker who addressed the conference.
The morning session closed with a panel session ‘Whose risk is it anyway?’ which looked at the likely development of defined contribution (DC) provision in the UK. One of the speakers, David Liebrock of Fidelity Group Pensions, charted the US experience of DC to provide a possible model. In the early 1980s, around 70% of US DC investments were held in guaranteed investment contracts (GICs), roughly corresponding to UK with-profits contracts, and with monthly or quarterly service delivery.
Today DC plans will offer a dozen investment options and service delivery is on a daily basis. In the question and answer session which followed, UK investment houses were roundly criticised for failing to make substantial headway on speeding up service delivery and holding back DC development in the UK.
At another group session, questions were fielded by a panel of NAPF experts. Attention was drawn to corporate governance issues and the NAPF’s revamped voting issues service. The service now has its own director in John Rogers and operates as a separate unit from the association’s investment service.
The NAPF is currently urging the UK Government to incorporate into company law a NAPF proposal to require quoted companies to ask shareholders to vote every year on the reports of board remuneration committees. On the issue of Socially Responsible Investment (SRI), a comment from the floor echoed the view that the UK Government’s recent move to require fund trustees to spell out in their statement of investment principles the extent to which SRI considerations were taken into account (if at all) simply amounted to passing the buck.
The panel was asked about the gilt famine. Chancellor Gordon Brown’s prudence had led to a Government that did not need to borrow. Nevertheless, David Gould, director of the NAPF investment service, saw the association as having been particularly successful in influencing the Debt Management Office to take into account the interests of UK pension funds.
Alan Rubenstein, a member of the NAPF panel, urged funds to look at AA-rated corporate bonds and pick up a higher yield. “Look for a broader spread of fixed interest assets,” said Rubenstein, ‘but look at the risk of mismatching’. He was pointing out an old problem: AA-rate corporate bonds are not recognised by the minimum funding requirement (MFR).
Prime Minister Blair’s exhortation to pension funds to invest in venture capital has struck a chord and the earlier decision of the Mineworkers’ Pension Scheme to raise its holding in venture capital had made many sit up. The NAPF feels that the real problem is that there is a shortage of suitable projects. However, although venture capital is a high-risk asset class, more funds were looking favourably on this avenue of investment because of the potential returns. Gould drew attention to an important report to be produced by the British Venture Capital Association in conjunction with the London Business School early in the New Year. And once again, that old problem raised its head: venture capital is not recognised by the MFR.
“Well perhaps the MFR would be dropped,” suggested a speaker from the floor. But Mike Pomery, chairman of the actuaries’ pensions board, reminded delegates of why the MFR was devised in the first place. Besides, it was pointed out from the panel, the forthcoming European directive on prudential rules for occupational pension schemes would almost certainly take a quantitative rather than qualitative approach. External policies that constrain investment freedom, for good or ill, are likely to stay in place.