Ten years after the flotation of Mirror Group Newspapers, the company whose pension fund was raided by the late, unlamented press baron Robert Maxwell, the subject of pensions regulation is again high on the agenda.
The report on institutional investment by Paul Myners, chairman of Gartmore Investment Management, has already become famous as the document that has recommended scrapping the Minimum Funding Requirement legislation introduced after the Maxwell pensions scandal. But the report covers a number of issues that will also have direct impact on FDs.
Firstly, the MFR regulations are said to have skewed pension fund investment into (increasingly scarce) gilts rather than equities, so the availability of capital for investment in companies may increase. A new approach to fund appraisal may also result in more funds going into riskier investments such as venture capital. Secondly, many FDs are trustees of their company pension schemes and Myners looked at the qualifications of trustees. Thirdly, it recommends more shareholder activism to encourage good corporate governance as a means to improving returns.
Though it is difficult to be precise, the MFR, created by the Pensions Act 1995, is widely believed to have shifted investment money into the gilts market because that is the best way to avoid divergence from the minimum asset value required once the pension scheme’s liabilities are discounted back to the present day. The MFR has also shifted pension schemes away from defined benefit (which would require sponsoring companies to bear the cost of topping up the funds from time to time, if necessary) to defined contribution (which carries no threat of additional costs to employers as the employee bears the market risk).
But Myners argues that FRS17 on retirement benefits can have the same effect as the MFR (whilst acknowledging that it is not such a binding obligation as the statutory rules). FRS17 has the effect of taking variations in pension fund surpluses or shortfalls through the statement of total recognised gains and losses (but not the p&l). It has been argued that companies’ schemes will invest in the gilt market to avoid big fluctuations going through the STRGL. Myners says that the effect of the reporting standard on pension fund investment decisions “will need to be monitored, and if it were found to be having strong distorting effects, the review believes it would be right to revisit the issue.”
On the subject of decision-making, Myners says that pension fund trustees must question whether they themselves are devoting enough time to their duties, whether they have the right skills for the job and whether the fund’s “control environment” is “fit for the purpose”. In a survey conducted for the report, a large minority of trustees were not even able to correctly answer such basic questions as whether the pension scheme used one fund manager or several. Myners adds that trustees ought to be paid for undertaking the responsibility, and that there ought to be a change in the law to require trustees to make decisions “with the skill and care of someone familiar with the issues concerned” rather than the “ordinary prudent person” test as at present. “There is no suggestion (in the current law) that trustees have any duty to equip themselves with expertise beyond that which they (already) possess,” Myners says. FDs, who frequently act as trustees, are perhaps uniquely well qualified to work with their colleagues in examining issues such as training, commitment, preparation and controls.
Interestingly, Myners recommends that pension funds abide by a Cadbury-style code of practice covering such issues as publication of objectives, decision-making, performance measurement, benchmarks, and so on. He says this should be prepared on the basis of disclosure and transparency – divergence from the principles being allowable provided it is clearly explained. Again, FDs’ experience with the Combined Code will be useful.
Myners welcomes the recent trend towards shareholder activism, but wants things to go further. In fact, he would like to see pension schemes adopt in their code of practice the US Department of Labor Interpretative Bulletin, which makes clear that the fiduciary obligations require fund managers “to vote proxies on issues that may affect the value of the plan’s investment”.
Relevant issues include the expertise and independence of directors, their remuneration, business plans, financing, workforce training, M&A strategy and more. Myners says that the principle of the US document “should in due course be more clearly incorporated into UK law”.
Myners believes that shareholders and the economy at large benefit from activism. In fact, he says that the emergence of specialist funds that target under-performing companies “as a precursor for lobbying for change” is evidence of “opportunities being forgone as a consequence of inaction by other investors”. Moreover, the growth of index-linked funds – which are barred from selling shares in constituent companies – may in itself result in more activism as a means of improving investment performance.
Institutional Investment in the United Kingdom: a review, available from www.hm-treasury.gov.uk/docs/2001/ myners_report0602.html.
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