Why governance is key for Kitts
If you were inventing a pension system you probably wouldn't have much of an ambition to emulate the UK. So how does Arno Kitts, the new chairman of the National Association of Pension Funds (NAPF)investment council, aim to redress the structural problems in UK pension funds governance, set-ups that may be hindering the implementation of optimal investment strategies?
First, Kitts says he feels a great sense of responsibility as the most recent electee to the chair of the NAPF's investment council. Since he is a statistician and investment manager by background - and is currently Henderson's head of institutional business - he ought to have a useful background to bring to the investment council's deliberations, even if does not have a pension fund background per se.
"Clearly I am not from that constituency and in some ways that makes my hearing more acute because I am really listening to what pension funds are saying," he says.
There is certainly no shortage of issues for the investment council to deliberate on. One new one is Solvency II for pension funds. Kitts, who has an insurance background, feels qualified to offer a useful perspective. The NAPF as a whole is keen to lobby against the introduction of Solvency II-type regulations for pension funds.
Closer to the NAPF's Westminster headqurters, the current review of the Myners principles recently involved a meeting at 11 Downing Street with the Treasury to discuss findings. Results and recommendations of this review are expected at the end of the year. An investment council working party on consultants is also underway, looking at how they can be effectively measured.
So apart from these priorities, what does Kitts aim to achieve? Facilitating industry consolidation is one key area. While the Netherlands and Switzerland are undergoing a period of fairly steady pension fund consolidation, the UK's structure of corporate pension funds and regulation has so far hindered mergers. And the buyout market, which might represent a sort of back-door route to consolidation, is still in its infancy.
"At this meeting at Downing Street and at other forums I hear a lot of discussion about the big schemes versus the long tail of NAPF membership," says Kitts. "There are fixed costs to running an occupational pension scheme and the fixed costs are increasing. "The question is how can the industry and government help people address that issue. Consolidation isn't happening naturally but it is an area that is worthy of exploration because a lot of these issues are particularly challenging for smaller pension funds."
One answer, Kitts says, is some form of merger or co-operation so they can afford more internal resource, which would also allow them a greater budget on external services. "There is research that shows that better governance generally leads to better results. There has to be a way forward but I do not know that it's clear what."
A related problem is that smaller pension funds are not usually active in forums like the NAPF's investment council: "When I sit at council most of the members are from very large pension plans. And so we find ourselves talking about some of the challenges and issues facing people that aren't in the room and I think that is something we need to address.
"It's difficult to get them to come to the meetings because they are all busy running their widgets companies. That's the catch 22. The level of governance is clearly lower with smaller funds and maybe one of the answers is to make governance simpler for them."
That is certainly one area that has been raised in the whole area of outsourcing strategies - such as implemented consulting or fiduciary management as practiced in the Netherlands. And as these providers promote their services in the UK, what a perfect opportunity to put their ideas on the agenda at council and for discussion at the next annual investment conference.