THE MYNERS REVIEW

Introduction

The Report entitled "Institutional investment in the UK: a review", commonly known as the Myners Review, was published on March 6th. During his Budget speech the next day, the Chancellor accepted the conclusions of the report in full.

Following a short consultation period, the Government published its formal response on October 2nd.

The recommendations are voluntary at present. Many of the comments and recommendations are still under discussion within the industry and it is likely to be at least two years before any discernible consensus is reached on some of the items.

Summary of Myners Recommendations

Pension funds:the context for investment decision-making

  • The review recommends that trustees should assess the effectiveness of their own contribution to meeting the objectives of the fund as they do that of their advisers and fund managers, considering issues such as:
    • whether or not the decision-making structures they have in place address the task of effectively running their fund;
    • whether their division of time between their various responsibilities is right;
    • whether they have the right mix of skills and experience collectively; and
    • whether the fund's control environment is fit for the purpose.
  • The review recommends that it is good practice to pay trustees, unless there is a specific reason why this may be unnecessary (for instance where they are senior executives of the sponsor company).
  • The review proposes that there should be a legal requirement that where trustees are taking a decision, they should be able to take it with the skill and care of someone familiar with the issues concerned. If they do not feel that they possess such a level of skill and care, then they should either take steps to acquire it, or delegate the decision to a person or organisation who they believe does possess this level of skill and care.
  • The review recommends that the Statement of Investment Principles (SIP) should be strengthened so that members gain access to better quality information as a matter of Course, and that it should be sent out to members annually.
  • The review recommends that it is good practice for pension funds to have an investment Subcommittee.
  • The review recommends that trust deeds should not prohibit the use of particular instruments such as derivatives or prohibit investment in certain asset classes. Nor, other than with good reason, should SIPs or fund managers' mandates. Where they do contain unjustified prohibitions, they should be amended.
  • The review recommends that funds and their sponsors should increase their investment in training for trustees.
  • The review recommends that sponsor companies should ensure that trustees have sufficient in-house staff to support them in their investment responsibilities.

Investment decision-making by trustees

The review recommends that trustees should:

  • set out explicitly an overall investment objective for the fund which represents their best judgment of what is necessary to meet the fund's liabilities;
  • set objectives for their fund managers that are coherent with the fund 's aggregate investment objective; and
  • set out explicitly what decision is being taken by whom. Decisions on the investment of the fund should be taken only by those with the skills, information and resources necessary to take them effectively.

Actuaries and investment consultants

  • The review recommends that contracts for actuarial services and investment advice should be opened to competition separately. Pension funds should be prepared to pay sufficient fees for each service to attract a broad range of kinds of potential provider.
  • Trustees should arrange for formal assessment of their advisers 'performance and of any decision-making delegated to them.
  • Trustees should not take investment advice on an asset class from an investment consultant who lacks expertise in that asset class.
  • Fees devoted to asset allocation should properly reflect the contribution it can make to the fund's investment performance.

Fund managers

  • The review recommends that funds should:
    • explicitly consider, in consultation with their investment manager, whether the index benchmarks that they have selected are appropriate; in particular, whether the construction of the index creates incentives to follow suboptimal investment strategies;
    • set limits on divergence from the index which reflect the approximations involved;
    • consider explicitly for each asset class invested whether active or passive management would be more appropriate; and
    • where they believe active management to have the potential to achieve higher Returns, set both targets and risk controls which reflect this, allowing sufficient freedom for genuinely active management to occur.
    • The review recommends that pension funds should provide fund managers with clarity about the period over which their performance will be judged -and hold to that under the terms of the contract, unless clearly abnormal circumstances arise.
  • The review recommends that all pension fund trustees should incorporate the principle of the US Department of Labor Interpretative Bulletin on activism into fund management Mandates. It also recommends that the principle should in due course be more clearly incorporated into UK law.
  • The review recommends that it is good practice for institutional investment management mandates to incorporate a management fee inclusive of any external research, information or transaction services acquired or used by the fund manager, rather than these costs being passed on to the client.

Defined contribution schemes: specific issues

  • The review recommends that the National Association of Pension Funds investigate ways of collecting more comprehensive data on the investment decisions of defined contribution schemes.
  • The review recommends that investment decisions taken on behalf of defined contribution scheme members should accord with the principles set out in Chapter 11.
    In particular:
  • a) where a fund is offering a default option, trustees should ensure that an objective is set for the option, including expected risks and returns; and
  • a) when selecting investment options, trustees should:
    • take into account the members 'preferences; and
    • ensure that they offer a sufficient range of funds to satisfy the risk and return combinations reasonable for most members.
    • The review recommends that defined contribution schemes should, as a matter of best Practice, consider a full range of investment opportunities, including less liquid and more volatile assets. In particular, investment trusts should be considered as a means of investing in private equity.
  • The review recommends that the Government should keep under close review the levels of employer and employee contributions to defined contribution pensions, and the implications for retirement incomes.

Pension fund surpluses

  • The review recommends that the tax rate on the withdrawal of surplus should be reduced.
  • The review recommends that the Law Commission should be asked to review whether the objective of maximum clarity over ownership of the surplus can be achieved through legal Change.

Minimum Funding Requirement

  • The review recommends that the MFR should be replaced by a regime based on transparency and disclosure, under which pension funds would report publicly on the current financial state of the fund and on future investment plans.
  • The review proposes that each defined benefit pension fund should be required each year to set out in clear and straightforward language such matters as:
    • the current value of its assets and in what asset classes they were invested;
    • the assumptions used to determine its liabilities;
    • planned future contributions;
    • its planned asset allocation for the following year or years;
    • the assumed returns and assumed volatilities of those returns for each asset class sufficient to meet the liabilities;
    • a justification by the trustees of the reasonableness of both their asset allocation and the investment returns assumed in the light of the circumstances of the fund and of the sponsor; and
    • an explanation of the implications of the volatility of the investment values for possible underfunding, and a justification by trustees of why this level of volatility is judged to be acceptable.
  • The review recommends that the level of compensation provided by the Pensions Compensation Board for non-pensioner members be increased to cover not simply the 90 per cent of MFR liabilities as at present, but something closer to the cost of securing members 'accrued rights (or the amount of the loss, whichever is the lesser).
  • The review recommends that there should be a statutory requirement for funds to have independent custody.
  • The review recommends that the Government continues to take a close interest in the current European discussions on pension provision. The Government should make the case in Europe that such standardised requirements are flawed and counterproductive, and are not in the best interests of pensioners.

There is a section covering Pension Fund investment in private equity.

There are also sections on Life insurance, Pooled investment vehicles and Local Authority Funds, which are not relevant to the IBM Plans.

Principles

  • The review recommends the following principles as the foundations for the whole investment process.

The 11 principles are as follows:

  • Effective decision making
  • Clear objectives
  • Focus on asset allocation
  • Choice of default fund (DC schemes only)
  • Expert advice
  • Explicit mandates
  • Activism
  • Appropriate benchmarks Performance measurement Transparency
  • Regular Reporting

The Government's Response

The Governments response recognised that the basic aims of the review were to promote long term investment and protect investors. It "fleshed out" some areas (for instance; investment in private equity) and restated the importance of the 11 principles. It seeks to promote a "voluntarist" and "common sense" approach to the subject, but recognises that in some areas (for instance; the abolition and replacement of the MFR regulations) primary legislation will be required.

External Reaction

The pensions industry in general has broadly welcomed the report, but expressed some concern over the "shareholder activism" and " broker commission" recommendations.

Pensions Trust Comment

Many of the Myners recommendations have already been implemented by the IBM Pension Trustee. For example: Setting appropriate performance and risk benchmarks, having an Investment Committee, having separate contracts for actuarial and investment advice and using an independent Custodian.

However, the Trustee is and will continue to review the Report's recommendations over the coming months and will make changes and improvements as appropriate.


The full text of the Myners review can be found at:
http://www.hm-treasury.gov.uk/newsroom_and_speeches/press/2001/press_myners_01.cfm

The full text of the Governments response can be found at:
http://www.dss.gov.uk/publications/dss/2001/myners/response.pdf

D Newman, Pensions Trust Manager
December 2001

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