A DAMNING report into the UK's pension fund industry yesterday stopped short of recommending compulsory changes to the way pensions are managed. But industry players will have to sign up to a code of conduct - or give reasons why they choose not to.
The findings revealed yesterday by Paul Myners, chairman of pension fund manager Gartmore Investment Management, bring to a conclusion a 10-month investigation into the pension fund industry requested by the Chancellor, Gordon Brown, in last year's Budget. Mr Myners has taken a co-operative approach in his enquiries and few observers had expected him to propose root and branch reform yesterday. But many were surprised at his dim assessment of the industry.
Mr Myners reiterated his suggestion, made in November, that pension schemes' Minimum Funding Requirement - introduced in the wake of the Mirror Group pension scandal - be scrapped in favour of regular statements from pension funds about proposals to meet future liabilities. But the Treasury and Department of Social Security will today publish a paper on the MFR, raising the possibility of early reform on this matter.
The real surprise, however, was in Mr Myners' verdict that, from the top down, pension funds' performance is hampered by a lack of expertise on the part of key decision makers. Moreover, the fund managers employed to look after pension funds' shares on a daily basis are more interested in outperforming each other, rather than ensuring that the funds meets their promise to pay pensions.
The main problem arising from this collective shortfall in standards is a lack of diversity. Pension funds are relatively unexposed to some of world's most exciting investment opportunities, including the domestic private equity market.
Why? The final say in deciding how to allocate pension fund assets lies with the funds' trustees, but their expertise is shockingly limited. Some 62 per cent of trustees have no investment qualifications. Half spend only 12 hours a year preparing for meetings. "I respect the sincerity of the view that being a trustee is like being a scout master or a churchwarden. But it's hardly the basis on which to think about the management of pounds 800bn of assets," Mr Myners said.
This might not be such a problem were there not only four main investment consultants that trustees rely on to help them in their asset allocation decisions, such as whether to get into Japanese bonds or UK tech stocks. The concentration in the investment consultancy sector is symptomatic of the way that trustees undervalue its advice, thereby deterring new entrants from coming in. Investment consultants' fees are minuscule relative to their importance of the decisions that they influence. "The consultants say they only advise, they don't make the decisions. But the trustees say they generally take the advice of the consultants," Mr Myners said.
At the same time, the structure of the fund management industry serves to reinforce problems further upstream. Fund managers have forgotten their primary objective, namely to meet the promise of paying someone's pension by managing a fund according to its own distinct risk-reward criteria. …