‘Do you agree that trustees should set out in writing their collective beliefs?’ This is neither a trick question nor one from an evangelical zealot interested in the moral uprightness of trustees, but taken from the discussion paper from the NAPF ‘Institutional Investment in the UK Six Years On’ (January 2007). Even though the beliefs in question relate to investment philosophy and not to some more fundamental moral system, one wonders just how this pensions credo would help either trustees or members to assess how implementation of the Myners Principles on institutional decision-making would be assisted by having to produce yet another document.
After all, trustees already have to maintain and publish statements of investment principles and funding principles (among other disclosure requirements). To be fair to the NAPF, which was tasked in 2005 by the Government with assessing how well the industry was doing in implementing Myners, as the introduction to its paper acknowledges, the world has changed signifi cantly since Paul Myners was fi rst commissioned to investigate the quality of institutional investment decision-making in 2000. Not only do we no longer generally have the irksome problem of surpluses, but also most DB schemes have closed to new members and/or future accrual, leading to a radical shift in liability profi les. The NAPF paper highlights other macro-economic trends: the growth of alternative asset classes such as hedge funds (which were not considered in detail in the original review) and the undeniable importance of private equity in the mergers and acquisitions markets. Less relevant perhaps (at least to the Myners Principles) is the corollary of the shift from trust-based DB schemes to contract- based DC arrangements, since this, along with the move from equities to bonds, is cited as a reason why the principle of shareholder activism may no longer be as important as Myners originally thought. Surely shareholder engagement matters (and adds value if it does at all) whether a scheme holds 30% or 70% in equities?
What is not so clearly brought out in the NAPF paper is that there have also been a number of legislative and self-regulatory developments which arguably make a lot of the original Principles redundant. Foremost among these is the requirement for trustee knowledge and understanding (TKU) under the Pensions Act 2004 which implements Myners’ fi rst and most important Principle of effective decision-making. This duty expressly requires familiarity with investment principles and the related topic of scheme funding. Of course, the Regulator’s Code of Practice on TKU reinforces the importance of training and standards of professionalism generally.
We have also seen the implementation of European prudential standards for decision-making via the Occupational Pension Schemes (Investment) Regulations 2005, which amended the contents of trustees’ statements of investment principles and introduced a formal requirement to consider trustees’ attitude to risk. Those Regulations also require trustees formally to have regard to the attributes of different asset classes, to ensure the security, liquidity and profi tability of their portfolios as a whole.
The NAPF paper asks many questions (56 in all) but does not actually suggest particular amendments to the Myners Principles as such. Its main recommendations, following on a theme proposed in the Treasury’s paper in December 2004, concern larger schemes’ compliance with the Principles. The key suggestion is that for schemes with assets over £250m (of which the NAPF says there are 450 in the UK) an Independent Compliance Review (ICR) should be carried out every three years to assess how well each scheme measures up to the Principles.
This review would have to be carried out by someone unconnected with the scheme: an auditor would be deemed independent enough, but one suspects there is an opportunity here for a new cottage industry. Interim annual reviews could be carried out by the pensions manager or an investment consultant connected with the scheme.
The NAPF has costed an ICR on the above cycle at approximately £7,500 per annum per scheme or £3.4m globally. Somewhat rhetorically, the paper makes the observation that ‘if these improvement proposals [ie an ICR] added an additional [sic] 0.001% to investment returns it would cover the cost of the estimated ICR to a fund with assets of £750 million’. Consultation on the NAPF paper closed formally on 13 April although the NAPF is still encouraging responses; it has committed to complete its review by October 2007.
It remains to be seen whether the idea of an ICR will be endorsed by the industry and, indeed, whether there will be enough bold voices to point out that a lot of Myners’ original objectives have been achieved already.