Laws Must Underpin Pension Fund Management

Financial News, June 9, 2002 | Go to article overview

Laws Must Underpin Pension Fund Management


Byline: Robert Monks

The most principled libertarian would agree that government must act in order to protect the virtuous in pursuit of the common good. Civilisation needs laws to protect it. This approbation would apply particularly in a situation in which the problem has been caused by the unintended consequences of well-intended government actions. Enough - let's start at the beginning. Following World War II, enlightened Western governments became aware of the need to create a climate that encouraged people to provide for their needs in retirement. This took various forms, but in the United Kingdom and the United States in particular its huge success was a function of encouraging individuals and businesses to save.

The 'tax cost' of this encouragement was very large, so, in order to assure that the taxpayers got what they were paying for, the government required that retirement savings be held in trust. The trustees were solemnly 'tasked' to insure that the proceeds were used only for the specified purposes. So much for intent. What also happened - that no one anticipated - is that virtually the entire savings of both countries became accumulated in trust form. This explains why in the year 2002 we find that controlling share ownership in virtually every publicly traded company in New York and London is held by institutions, with the dominant one being pension funds. Nobody intended that individual flesh-and-blood corporate owners would become irrelevant; such was the unintended consequence of the pension scheme success.

The second unforeseen consequence came from Big Bang and the liberalisation of ownership of financial institutions. Providing investment management and other services to pension schemes is the lucrative 'cash cow' for the financial services sector. But, as the conglomeration of banks, insurance companies, mutual funds and money managers has occurred, so conflicts of interest have followed as night follows day.

Not only does an individual fund manager today have all the familiar problems of 'collective action' (that is, what is undoubtedly good for the group is nonetheless not attractive for individuals to initiate), but they also face the more legally challenging conflicts of interest.

This conflict was particularly apparent in the recent Hewlett Packard (HP) proxy contest in the US. Deutsche Asset Management (DAM) not only managed a portion of the HP pension portfolio, they held HP shares in other investment accounts and they negotiated an incentive contract for services in the proxy contest with a success bonus. …

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