| Pension fund trustees should not use peer group benchmarks according to the controversial Myners report |
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| The UK Government’s plan to adopt radical proposals will lead to a fundamental shake up of the UK institutional investment industry - and will change the way pension fund trustees and the fund managers there work. |
The UK Government intends to take forward all the recommendations made by the Myners Review which was published on 6 March 2001.
The report, Institutional Investment in the UK, included a number of criticisms on how pension scheme trustees take crucial investment decisions. It argued that due to a lack of resources and experience many trustees are relying heavily on a small number of investment consultants whose performance is not usually assessed or measured. It also criticised the ‘herding mentality’ of schemes which results from fund managers being set ‘peer group’ benchmarks and active fund managers being set risk controls which give them little choice but to follow stock market indices closely. Other criticisms were:
• that the time-scales for measuring a fund manager’s performance lead to short-termism
• that broking commissions are subject to insufficient scrutiny, and
• that fund managers are reluctant to intervene in companies in which they have substantial shareholdings even where this would be in their clients’ financial interests.
Myners had already set out his proposals for the future of the minimum funding requirement (MFR) ahead of the main report in an open letter on 8 November 2000, and these views have not changed.
After identifying the failings in institutional investment, the report went on to make a number of proposals for change. It recommends that trustees set out an overall investment objective for the fund and give fund managers both an explicit written mandate setting out investment objectives, and a clear time-scale for measurement and evaluation.
Trustees should be prepared to consider all investment classes, including private equity, and the attention devoted to asset allocation decisions should reflect the contribution they can make to achieving the fund’s investment objectives. Trustees should be required to be familiar with the issues on which they make decisions, and should also be paid. Other recommendations included:
• replacement of the MFR with a regime based on transparency and disclosure
• a request for the Law Commission to review the question of greater legal clarity on the ownership of surpluses
• restoration of the differential between the rate of taxation on the withdrawal of pension fund surpluses and the rate of corporation tax to its original level
• legislation to change the taxation of insurance companies’ limited partnership investments to taxation of the gains as distributed from the fund
• abolition of the 20-partner limit for limited partnerships and removal of the requirement for pension funds to invest in limited partnerships through an FSA-authorised person
• a follow-on review of capital and information flows relating to personal investment products.
Although welcomed by the National Association of Pension Funds (NAPF), the Myners report has not been universally praised. It has been criticised by Towers Perrin for failing to measure either the value of implementing its proposals or the costs to schemes of the present system. |
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| Article appeared in the March 2001 issue.
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