The National Association of Pension Funds has published its compliance review of the Myners’ principles. The report finds significant progress has been made. However in the face of a changed pensions landscape, it recommends consolidating the current principles into six high-level principles, supplemented by practical guidance, and strengthening the “comply or explain” approach to trustees’ decision-making processes. Both the Government and pensions industry have welcomed these findings.


In March 2001 Paul Myners published his original report on the review of institutional investment in the UK. The aim of the review was to assess whether institutional investors were being unduly restrictive in their asset allocation, especially with regard to private equity. However, the review also revealed several weaknesses in the governance and decision-making processes of institutional investors in general, and occupational pension funds in particular. Myners reported these deficiencies were detrimental to the interests of both scheme members and their sponsors. His conclusion was that there were a number of areas where change would result in improved decision-making and he recommended that pension fund trustees should voluntarily adopt, on a “comply or explain” basis, a series of ten principles codifying best practice for investment decision-making (the Principles).

In 2004, HM Treasury assessed trustees’ response to the Principles, and found that around 70 per cent of schemes reported that they were fully or mostly compliant with the Principles in general. While significant progress had been made in most areas, there remained concerns about specific perceived weaknesses in relation to pension scheme investment, including: the skills and expertise of trustees; performance measurement and reporting; and the clarity of the role and relationships of trustees and their investment consultants. As a result of these findings, HM Treasury concluded that the original Principles should be strengthened if Paul Myners’ original proposals were to be fully implemented.

Following the 2004 review and the Government’s wish that the industry should continue to improve its adoption of, and adherence to, the Principles, the National Association of Pension Funds (the NAPF) agreed to undertake a further compliance review this year. This month, the NAPF published its report and recommendations, Institutional Investment in the UK: six years on.

Context of the 2007 review

Since the Principles were first published in 2001, the pensions landscape has changed hugely. Even since the Treasury’s review in 2004, pressures on trustees have increased significantly. The most marked changes since 2001 have been in the following areas:

  • scheme funding – the introduction of the new scheme specific funding regime and the fact that most final salary schemes now have significant deficits;
  • the burden of legislation, with more than 400 sets of pensions regulations being brought into force;
  • falling equity prices and increased longevity have combined to increase scheme liabilities;
  • around two thirds of final salary schemes have closed to new members and available statistics point to there being more active members in private sector money purchase schemes than in private sector defined benefit schemes.

The current priorities for trustees are to: address scheme deficits; assess the strength of the employer covenant; take increased responsibility for the security of members’ benefits in the event of corporate transactions; and deal with legislative change. These issues have dominated trustee agendas over recent years.

Progress of schemes’ compliance with the Principles

In order to assess current compliance, the NAPF adopted a consultative approach and the resultant report includes the views of scheme trustees themselves. It was found that significant progress had been made in respect of all ten Principles, particularly in the areas of:

  • trustee knowledge and understanding (Principle 1);
  • asset allocation (Principle 3);
  • expert advice (Principle 4);
  • appropriate benchmarks (Principle 7);
  • transparency and reporting (Principles 9 and 10);
  • for larger schemes, activism (Principle 6).

In addition, on the key Principle of investment decision-making, it was found that trustees’ knowledge and understanding has improved considerably, with all trustees surveyed by the NAPF having a good or reasonable knowledge of pensions and investment issues.

However, progress has been uneven and less rapid in respect of trustee self-assessment. The NAPF found that, although trustees have made significant progress in assessing the performance of their advisers, they remain reluctant to assess their own performance. As regards small schemes, problems arose from the inability to access the investment efficiencies that come with scale, and this was an issue the NAPF felt should be addressed in the next phase of the Principles’ development.

NAPF’s conclusions and recommendations

The NAPF concludes that standards of pension fund governance and decision-making have improved and that the investment chain is now functioning more efficiently. There is considerable support for the Principles, although it is widely accepted that they required updating and consolidating. The NAPF’s recommendations provide a framework to ensure the continued improvement in the areas where further progress is needed. Its recommendations to HM Treasury are summarised below.

Recommendation 1: Voluntarism should remain at the heart of the Principles, reinforced by a strengthened “comply or explain” approach to reporting. The NAPF favours a requirement for trustees to inform scheme members how they have applied the Principles. The form and content of the trustees’ report should not be prescribed by regulations.

Recommendation 2: The current Principles should be replaced with fewer, higher-level Principles for today’s pensions environment. The NAPF notes that some of the original Principles have been superseded by legislation and it recommends that the current Principles should be replaced with six high-level Principles which are relevant to today’s challenges facing trustees.

The suggested six high-level Principles are:

  • Effective decision making – decisions should only be taken by persons or organisations with the skills, information, advice and resources necessary to take them effectively and monitor their implementation. Decision makers must have sufficient expertise to be able to evaluate critically the advice they receive;
  • Clear objectives – trustees should set out an overall investment objective or objectives for the fund that takes account of all the scheme’s liabilities, the strength of the sponsor covenant as well as the attitude to risk of both the trustees and the scheme sponsor;
  • Risk and liabilities – in settling their investment strategy, trustees should take account of the risks and form and structure of the liabilities faced by the scheme. These include the strength of the sponsor covenant, including the risk of sponsor default, and longevity risk;
  • Performance assessment – trustees should arrange for the formal measurement of the performance of the fund, its managers and advisers. Trustees should also periodically make a formal assessment of their own effectiveness as a body and report on this to scheme members in the annual report and accounts.
  • Responsible ownership – trustees should adopt, or ensure that their investment managers adopt, the Institutional Shareholders’ Committee Statement of Principles on the responsibilities of institutional shareholders and agents. A statement of the scheme’s policy on responsible ownership should be included in the Statement of Investment Principles. Trustees should report periodically to members on the discharge of such responsibilities.
  • Transparency and reporting – Trustees should act in a transparent manner, communicating with scheme members on issues relating to their management of the investments, including performance against stated objectives. Communication with members should be provided periodically in the form the trustees consider most appropriate.

If trustees choose to depart from any of the above new principles, they should give reasons to the scheme members for their decision.

Recommendation 3: High level Principles should be supplemented by supporting guidance and toolkits to give trustees practical support. There should be practical guidance for schemes and trustees in support of the slimmed-down Principles and the pensions industry should be involved in the production and facilitation of any such guidance.

Recommendation 4: New approaches are needed to help smaller schemes comply with the Principles. The NAPF recognises that there should be further work and consultation on how small schemes can best implement the Principles, including the options available to introduce scale economies to small schemes.

Recommendation 5: The Pensions Regulator (TPR) should work with pension schemes, trustees and providers to take forward its proposals in relation to the governance of money purchase schemes. TPR should address the governance issues relating to the challenges presented by the rise of money purchase schemes. Principles for money purchase schemes should be refreshed to ensure they are relevant in the current pensions environment.

Recommendation 6: The Principles should be co-owned by TPR and the pensions industry. The Principles should not be owned by HM Treasury as they are currently, but instead should be jointly owned by TPR and the pensions industry. The NAPF hopes that this will ensure effective industry ownership and a joined-up regulatory framework.

Recommendation 7: Trustees should periodically undertake formal assessments of their own performance and that of the Board. Trustees with assets in excess of £250 million should undertake periodic reviews of their own performance and report this to members in the annual report and accounts.

Recommendation 8: A further, targeted review should take place in three years. The review should focus specifically on those areas of under-compliance identified in this review as well as the continuing relevance of the Principles.

Government comments

The Government has welcomed the NAPF’s findings that there has been significant progress in the application of the original Principles. Economic Secretary and City Minister, Kitty Ussher, said that the report reinforces the relevance of the Principles and recognises that further input into the Principles is important if they are to operate effectively on a “comply or explain” basis and to continue to adapt in response to changing market conditions. She confirmed that the goal remains as it was set in 2001 by Paul Myners: the Principles should be the accepted code of best practice in governance and investment decision-making, improving performance through trustees transparently assessing their capacity and practice against them.

Consultation proposed

The Government is keen to use the support from the NAPF to increase ownership by the pensions community and reinforce the “comply or explain” nature of the Principles. It says it will use the review's findings to improve pension scheme governance and the efficiency of investment decision-making and will consult on the proposed improvements to the Principles during 2008.

Further comments

The NAPF’s review has generally been welcomed by the pensions industry, particularly since it does not include a controversial proposal previously considered by the NAPF to recommend compulsory independent compliance reviews for schemes. Its recommendation that the original Myners’ Principle in relation to a “comply or explain” approach to trustees’ decision-making processes should be strengthened to include a requirement to report to members has been well received. The recommendation that further guidance for trustees should be provided is also seen as sensible.