The review marks another important step in the Government’s programme of reform to improve the efficiency of the investment chain which links savers and the companies in which they invest. This is of vital economic importance for productivity and long-term growth, because the investment chain is a critical mechanism for ensuring that investment is efficiently allocated. Announcing publication, Financial Secretary Stephen Timms MP said:
“I welcome the efforts that pension schemes, particularly the larger ones, are making to adopt the Myners principles: everyone – consumers, industry and Government, but especially pension schemes themselves – stands to benefit as a result. However, our review shows that further action is needed to accelerate progress in key areas, in particular in relation to trustee expertise and decision-making processes.”
Paul Myners, author of the original Myners Review, said:
“I am very pleased that the principles are now widely accepted as the benchmark of best practice for investment decision-making. But more change is needed before the vision of a much-better functioning system I set out in my original report will be realised.”
The Government proposes to strengthen and amplify the Myners principles in respect of the areas where progress has lagged. These revisions will make clear that:
- the chair of the board should be responsible for ensuring that trustees taking investment decisions are familiar with investment issues and that the board has sufficient trustees for that purpose;
- for funds with more than 5,000 members, the chair of the board and at least one-third of trustees should be familiar with investment issues (even where investment decisions have been delegated to an investment subcommittee);
- funds with more than 5,000 members should have access to in-house investment expertise equivalent at least to one full-time staff member familiar with investment issues;
- as well as contracting separately for investment and actuarial advice (as the principles currently require), in relation to investment advice, funds should also contract separately for strategic asset allocation and fund manager selection advice. (This is consistent with Sir Derek Morris’s analysis in his interim assessment of his review of the actuarial profession – see below.);
- trustees should provide the results of monitoring of their own performance to members, and ensure that key information provided to members is also available on a dedicated fund website.
The interim assessment of Sir Derek Morris’s review of the actuarial profession, also published today, provides further analysis of the investment consultancy market, and identifies a need: to increase trustee knowledge and understanding; to encourage greater scrutiny and market testing of advice; and to discourage the supply of such advice being bundled with other services.
Background
Myners principles for institutional investment decision-making: review of progress
- Paul Myners’ review of institutional investment decision making recommended that pension fund trustees voluntarily adopt, on a ‘comply or explain’ basis a series of principles codifying best practice for investment decision-making. The Government agreed that it would review progress after two years .
- Extensive research undertaken to underpin the assessment of the progress pension schemes have made in implementing the Myners principles was published in November 2003 and July 2004 .
- The Government’s analysis of and approach to the investment chain was set out in the Pre-Budget Report 2004, and an updated version is at Annex A for ease of reference.
- The Government is now consulting on its proposals. The consultation closes on 16 March 2005.
- Media enquiries should be addressed to Will Straw at the Treasury press office on 020 7270 4420.
- Non-media enquiries should be addressed to the Treasury Correspondence and Enquiry Unit on 020 7270 4558 or by e-mail to ceu.enquiries@hm-treasury.gov.uk.
- This press release, a PDF of the reviewand other Treasury publications and information are available on the Treasury website's securities and investment index. If you would like Treasury press releases sent to you automatically by e-mail you can subscribe to this service from the press site on the website.
- UK institutional investors manage almost half of UK equities, investing much of the long-term wealth of British savers and exercising indirect control and significant influence over much of British industry. But this ownership is intermediated through an ‘investment chain’ of relationships connecting ultimate owners with their investment in companies. Ensuring this chain works efficiently is of vital economic importance for productivity and long-term growth, because the chain is a critical mechanism for ensuring that investment is efficiently allocated.
- The chain is complex: in pensions, for instance, pension fund trustees - stewards on behalf of pension fund sponsors and members - are themselves advised by investment consultants; assets are in turn invested through fund managers and brokers with whom companies have crucial relationships; and companies’ financial statements are verified by auditors acting on behalf of shareholders – such as pension funds.
- Since the 1998 Pre-Budget Report, the Government has systematically investigated how well the investment chain works, notably through the Myners, Sandler and Higgs reviews. The interim assessment of Sir Derek Morris’s review further strengthens the analysis of the investment consultancy market, which provides key advisory services to pension funds and investment institutions. These reviews have identified critical and inter-connected areas where the chain has not been functioning as well as it should, including its various principal-agent relationships. Paul Myners’ review of the governance of mutual life insurance offices will be published very shortly.
- For example, issues identified at the “owner” end include:
- as Paul Myners’ review identified, pension fund trustee boards are, in general, weak customers. Typically unpaid, part-time and with little in-house investment support, many pension trustees themselves lack the necessary investment expertise to act as strong and discerning customers of the investment consultants and fund managers who sell them services;
- a number of problems that have resulted, including poor evaluation of advisers and their advice; a reliance by trustees on a small number of investment consultants, supplying actuarial and investment advice bundled together; insufficient resources devoted to the process of asset allocation; unclear contractual structures which generate strong and unnecessary incentives for herding and short-termism in investment; and insufficient focus on the potential for adding value through active shareholder
- as Ron Sandler’s review identified, competition in medium and long-term savings tends to revolve around access to distribution and product tax features, rather than superior underlying investment performance. Moreover, consumer understanding of what drives long-term investment performance is itself weak, and the advisers’ minimum standards of knowledge on investment issues are also low. As with pension funds, therefore, incentives for efficient and innovative investment management are weaker in the retail market than they could be.
- Issues identified at the “company” end include:
- Sir Derek Higgs’s review identified substantial scope for improvement in the UK’s corporate governance regime, in the role and independence of UK non-executive directors, and in the responsiveness of UK boards to the concerns of shareholders; and
- the Coordinating Group on Audit and Accounting highlighted scope for improvement in the UK’s audit regulation framework, the approach to auditor independence and the enforcement of accounting standards.
- The complex interactions between the issues at different points in the chain mean that each needs to be addressed if the overall goal of promoting more efficient approaches to investment is to be realised. In response to this analysis and the recommendations made by the reviewers, the Government has undertaken a programme of reform. In particular:
- to improve the quality of trustees’ investment decision-making processes, and the way they interact with their advisers and fund managers, the Government endorsed the “Myners principles” as a voluntary best-practice framework. The new Pensions Act 2004 will require trustees to have appropriate knowledge and understanding of investment matters, and the Occupational Pensions Regulatory Authority is currently developing a detailed code of practice to provide trustees with guidance;
- the Government’s assessment of progress made against the Myners principles after two years shows that, while behaviour is beginning to change, progress is lagging in key areas. The Government is therefore proposing changes to the principles designed to: strengthen trustee expertise; ensure more effective use is made of advisers; improve the quality of asset allocation activity and the resources devoted to it; and provide greater clarity on funds’ investment time horizons. And it will work with key stakeholders to improve the quality of the commentary trustees make on how they are implementing the principles;
- to tackle the problems of retail product complexity, poorly informed consumers, and adviser conflicts of interest, the Government has worked with the Financial Services Authority (FSA) to develop a suite of simplified and more transparent products, which should increase the focus on investment performance. More generally, new FSA rules will enhance disclosure to consumers of the cost of the advice associated with a packaged product;
- the bundling of actuarial and investment services by investment consultants has been addressed by Myners’ recommendation that trustees should tender separately for actuarial and investment advice. Sir Derek Morris’ interim assessment reinforces Myners’ analysis that the lack of expertise among pension fund trustees and the bundling of actuarial and investment advice are both key problems in the investment consultancy market;
- to promote more active engagement on the part of shareholders, in exercising their rights particularly where they have concerns about management, strategy or performance, the Government welcomed the Institutional Shareholders’ Committee principles in October 2002, and the commitment to reflect these principles in fund management contracts and insurance fund practice. The Government will be reviewing their impact on engagement shortly. Shareholders now have an advisory vote on directors’ pay, through the Directors’ Remuneration Report Regulations. The Government is also working closely with the Shareholder Voting Working Group to improve the efficiency of the shareholder voting process;
- the role and independence of UK non-executive directors, and their responsiveness to shareholders, will be strengthened by the revised Combined Code on Corporate Governance, which incorporates Sir Derek Higgs’s recommendations, and Sir Robert Smith’s proposals to improve the way the audit committee works. Progress will be reviewed after two years;
- the quality, and transparency of information flows along the investment chain – vital if owners are to act effectively - have been significantly improved. For example, the Government has reformed the regulation of the audit profession, enhanced audit transparency and auditor independence and strengthened the scrutiny of financial reporting. From April 2005, listed companies will be required to produce a forward-looking Operating and Financial Review of their business environment. The FSA is developing with the industry a rigorous transparency regime for broking transaction costs.
