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DWP Survey of Myners Compliance
The Department for Work and Pensions (DWP) recently published the findings of its quantitative research into the take-up of the Myners Principles by pension scheme trustees. This newsletter discusses some of the findings, and trustees may be interested to see how their scheme compares with other schemes of similar size. The full report can be found on the DWP's website www.dwp.gov.uk
Background to the survey
Paul Myners was commissioned by the Treasury to carry out a review of investment decision-making in UK pension schemes. The review was published in March 2001, and made a number of recommendations, referred to as "Myners Principles" in this newsletter.
The Government endorsed the Myners Principles in October 2001 and encouraged pension schemes to adopt them on a voluntary basis. The Government said that it would assess the take-up of the Myners Principles by pension schemes after two years, with the possibility that it would take further action if take-up rates were too low. The DWP made this assessment by carrying out a telephone survey of the trustees of 1,580 pension schemes between July and September 2003, the results of which were published in July 2004.
Time and resources spent on investment matters
The survey considered schemes of different sizes. The amount of time trustee boards spent on investment matters is shown in Table 1 below:
Overall, trustees spent an average of 10 hours a year in board meetings, of which 4 hours were devoted to investment matters.
Apart from very large schemes, the proportion of time that trustees spent on investment matters did not vary a great deal according to size of scheme. However, by virtue of holding more meetings and longer meetings, trustees of larger schemes do spend more time on investment matters, on average, compared with trustees of smaller schemes. This is reflected in the amount of progress schemes have made in implementing the Myners Principles.
The Department for Work and Pensions (DWP) recently published the findings of its quantitative research into the takeup of the Myners Principles by pension scheme trustees. This newsletter discusses some of the findings, and trustees may be interested to see how their scheme compares with other schemes of similar size. The full report can be found on the DWP's website www.dwp.gov.uk.
Asset allocation
Myners recommended that trustees spend greater time and resources on asset allocation decisions, and consider all asset classes, including private equity. The survey found that a majority of trustee boards had reviewed their pension scheme's asset allocation, with some 58% of schemes making changes to their asset allocation.
The survey found that most asset allocation changes were responses to changing markets or maturing pension schemes, rather than the more fundamental changes recommended by Myners. Only 28% of schemes considered investing in private equity, with just 6% including it in their portfolio. In general these were very large schemes. Reasons cited for rejecting private equity were risk and the cost of researching and accessing the asset class, particularly for smaller schemes.
Benchmarks
The survey found that "industry-wide" or "peer-group" benchmarks, where the investment manager has the aim of outperforming the average of other UK pension funds, were almost as common as "scheme-specific" benchmarks, which take into account a scheme's mix of assets and membership profile. This is despite Myners' recommendation that schemes should move away from "industry-wide" benchmarks.
Myners recommended that schemes should set timescales for evaluating their investment manager's performance, and should not remove their investment manager within this period on performance grounds alone. About half of the schemes surveyed had set a fixed timescale for manager evaluation; those who had not said that they typically reviewed performance quarterly and tracked performance against targets over rolling time periods. Of those schemes who set fixed timescales for evaluation, only half made it clear to their investment manager that they would not lose the mandate within this period. In other words, only a quarter of schemes followed this particular recommendation in full.
We are not surprised by this result. There are better ways to determine when to replace a fund manager than measuring performance over a fixed period. Barnett Waddingham LLP has developed a more sophisticated, riskbased approach which can be used by trustees.
Clear objectives
Myners recommended that trustees set out clear investment objectives to their fund, which relate to the fund's liabilities rather than performance relative to other pension schemes or a market index.
Myners envisaged that these objectives would be set out in the trustees' Statement of Investment Principles (SIP), which he suggested should be sent to members every year. Whilst the majority of trustees set out their investment objectives in the SIP as suggested by Myners, only 10% of trustees automatically send members either a copy of the full SIP or a summary. Nearly half of trustees let their members know that the SIP is available on request. However, a third of trustees do not make their members aware of the existence of the SIP.
Expert advice
Myners recommended that contracts for actuarial and investment consultancy services should be opened to separate competition, and that trustees should be prepared to pay sufficient fees to attract a wide range of potential providers.
The survey did not explicitly address the question of separate actuarial and investment advisors. In general, there was found to be a fairly high level of inertia with only a minority of trustees appointing new investment consultants or changing the role and responsibility of their existing investment consultant.
Explicit mandates
The survey found that 85% of schemes specify the frequency of reporting in their mandates, and 79% specify the substantive issues of benchmarks and evaluation frameworks. However, less than one-fifth of mandates specify in writing how the manager should attempt to meet the objectives, or confirm that the mandate will not be terminated on performance grounds alone.
Although mandates may not contain quite as much detail as Myners hoped for, the survey showed that trustees were pro-active in keeping on top of their investment managers. 70% of trustees have reviewed their investment manager mandates in the last two years, and 50% of trustees have a formal policy to review their mandates on an annual basis.
Effective decision-making
This Principle concerned trustees' own skills, training needs and support from the sponsoring employer. A majority of trustees undertook a formal review, with most of those increasing the amount of training given, particularly to new trustees. About a quarter of trustee boards have in place an ongoing training programme.
This part of the survey considered the relationship trustees had with their investment consultant and how this assists the decision making process. Trustees were overwhelmingly satisfied by the advice given by their consultant. However, two thirds of trustees had asked their consultant to provide a more rigorous explanation of their recommendations over the last year, and 15% had actually overruled a recommendation of their consultant over the same period.
Transaction costs
Myners recommended that all costs borne by pension funds in the area of investment management should be visible to trustees. This should lead do downward pressure on costs.
Only a minority of trustees had taken action on this Principle by the time this survey took place. However, the Investment Management Association published a code of practice on transaction costs in 2002 which led to schemespecific information being made available to trustees later in 2003, in many cases too late for the survey. This is therefore an area where we believe more progress is being made than the survey suggests.
Activism
Myners recommended that trustees use their shareholder powers to actively intervene where appropriate in the running of companies in which they invest. This could be done either directly, or by ensuring that their investment manager has an explicit policy on using the trustees' voting rights.
The survey found that very few schemes had taken action on activism. Those that had were generally larger schemes. The majority of trustees were relying on the activism policy of their investment manager. However, very few trustees considered the shareholder activism policies of investment managers in deciding which managers to appoint. There was a feeling, however, that the Principle was having a second-hand effect, with investment managers becoming more likely to intervene in company matters following the increased interest in activism generated by Myners.
Performance measurement
Virtually all (at least 97%) of trustees reported that they had a mechanism in place for monitoring the performance of their investment manager. 34% of trustees had considered the issue of performance measurement of their investment consultant and 22% of trustees had considered measuring their own performance.
This difference is probably due to the easier way that the performance of an investment manager can be quantified (against a particular benchmark), compared with the performance of a consultant or the trustees themselves. Investment consultants may typically be judged against more qualitative criteria, such as value for money, clarity of advice and responsiveness, rather than the performance of the fund's investments (which are not under their direct control).
Summary
The proportion of trustees considering, and acting on, the various Myners Principles is shown in Table 2 below:
On average, trustee boards acted on half of the recommendations. It was clear that the trustees of larger schemes took more action than trustees of smaller schemes.
The survey concludes that progress has been made but that there is still more work to be done, in respect of some Principles more than others. It recognises, however, the difficulty that smaller schemes face due to their limited resources. It finishes with a number of questions, including:
- Will the voluntary approach continue to achieve progress, or should there be a greater degree of Government prescription?
- Is there a role for greater use of disclosure requirements to reinforce voluntary compliance with the Principles?
Barnett Waddingham LLP considers that the Myners Principles generally represent a code of good practice. Many of our clients already broadly complied with most of the relevant recommendations before they were introduced. The Principles have highlighted areas where trustees may be able to improve their practice, and the survey shows that good progress has been made on a voluntary basis by many schemes. In this regard, the Myners Review has served a useful purpose. But we consider pension schemes to be over-regulated already and would not welcome any compulsion, even at the disclosure level.
Please speak to your usual Barnett Waddingham LLP contact to discuss any of the above
Barnett Waddingham LLP, October 2004.