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The Actuary The magazine of the Institute & Faculty of Actuaries

After Myners

Pension fund trustees remain committed to the use of external advice but are more focused on gaining value from advisory relationships, according to research sponsored by Instinet Europe.

Entitled ‘Taking the temperature of the UK pension fund industry’, the research is the second in an annual series first published by Instinet in 2003. The survey was conducted by Richard Davies Investor Relations (RD:IR) and examines the rate and direction of change in the UK pensions industry with regard to the recommendations set out in the Myners Review of Institutional Investment published in 2001. RD:IR interviewed 101 UK pension funds, representing funds under management of £312bn and 48% of the assets held by National Association of Pension Fund members in the UK. A full copy of the research report is available from Weber Shandwick.

External advice
The survey shows that the amount of external consulting advice sought by trustees has increased since Myners in the case of 40% of respondents – a slight rise of 3% since 2003. Comments made by respondents show that, in accordance with advice laid out in a recent Department for Work and Pensions post-Myners report, many trustees are focused on the importance of asset allocation, are improving their own knowledge, and are more likely to turn to alternative sources of advice.

At the same time, the research found evidence that pension funds are increasingly looking to gain value for their members by negotiating separate actuarial and investment consulting contracts. 24% of the 101 funds interviewed had negotiated separate actuarial and consultancy contracts since Myners, with a significant increase of 13% since last year. The notion of extracting value is further supported by the 15% increase in the number of funds that hold actuarial and investment contracts with separate organisations, delivering a total of 44% of respondents.

62% of the pension funds interviewed claimed that they had no formal way of measuring the quality of advice they were given from investment consultants, a 23% decrease since last year. That said, the survey shows that pension funds do aspire to find accurate methods of measuring the advice they receive from consultants but there is little common industry consensus and approach.

Trustee training
Myners recommended that trustees should become better informed about the investment decision-making process, specifying that trustees required training to fulfil their responsibilities. One of the key findings of the research is that, while the number of pension funds that have increased trustee training has improved since last year (48% to 63%), the average number of training days offered across the industry compared to last year’s figures has little changed at 3.3 days per year.

Transaction costs
This year’s research revealed that there has been an increase in pension fund requirements for investment managers to demonstrate that costs are being managed themselves. Over 48% of respondents claimed that they required their investment managers to manage their costs (an increase of 10% since 2003). In addition, the number of pension funds comparing trading costs of different managers has increased to 43%, along with 48% expecting their managers to demonstrate that they were trading at best value.

Soft commissions
In the past year there has been significant progress in the area of soft commissions. Compared with last year’s results, the number of funds that permit their managers to use soft commissions has decreased by 10%, to 42%. Only 3% of respondents thought soft commissions should stay as they are and 97% thought they should either be banned, more highly regulated, or subject to full disclosure.

Over 50% of pension funds believe that investment managers should control soft commissions through self-regulation with full disclosure. Having said that, it would seem that in practice information is lacking. 38% of the 42% that permit soft commissions believed that they have never had sufficient knowledge of the way in which the commissions were spent. In addition, of the 42% of funds that permit soft commissions, only 45% require their managers to provide a breakdown of what services they are receiving. There is a strong correlation between the size of the funds and the requirement for disclosure. Large funds are more likely to insist on this disclosure versus smaller funds, as are private funds in comparison with public-sector funds.,/p>