Publications

Bulletin 13 Autumn/Winter 1996/1997

Investment Management Agreements

For years the standard agreements used by major investment management houses have been very similar in content, if not in form. This is not surprising since they originate from a common source, a standard produced by their trade association, originally the British Merchant Banks Association and in recent years the Institutional Fund Managers' Association (IFMA).

IFMA, together with the London Investment Banking Association, has recently produced a revised standard agreement. What makes this version special is that an observer from the NAPF sat in on the discussions leading to its production.

Whilst the NAPF Investment Committee cannot endorse such an agreement, it has felt able to "encourage its use a common springboard, - -recognising that it represents a step forward in answering many of the criticisms of former standard agreements".

Hopefully this will reduce need for extensive reviews of what are often standard document

Brian MacMahon

We are pleased to announce the further strengthening of our team with the appointment of Brian MacMahon. Brian has spent all his working life in pensions. He joined Irish Pensions Trust in 1955 and remained there until 1973 when he joined Allied Breweries (now Allied Domecq) in Bristol. In 1982 he moved to London to rationalise BET's many and varied pension arrangements. He was appointed Director, Group Pensions at Rentokil Initial Plc, following its takeover of BET.

He is a fellow of the Pensions Management Institute and the Royal Society of Arts and a Director of the Privatised Pensions Trust. A Council member of the National Association of Pension Funds from 1982 to 1995, he was its Chairman in 1991 and 1992. A Council member of OPAS, the pensions advisory service, since its formation, he was president from 1993 to 1996

Applying the Pensions Act

With the activity in pension schemes probably reaching its peak in trying to get all the provisions of the 1995 Pensions Act in place before the various deadlines, we thought it might be useful if we shared our experiences so far.

In our normal role as a trustee sitting alongside other trustees, we are reluctant to take the initiative in matters such as implementation of the various Pensions Act provisions. We prefer the initiative to be taken by a scheme's advisers or administrator; it depends upon relationships. Where appropriate, however, we try to provide as much help as possible and take a lead when necessary.

Our starting point has been an abbreviated checklist. The critical items where we believe initial actions should be concentrated are the famous five, well known as DAMIT: D for Dispute Resolution; A for new Agreements with Professional Advisers; M for Member-Nominated Trustees; I for Statement of Investment Principles; and T for overhauling Trustee procedures.

Early on we came to the conclusion that many of the more technical matters were bound to be brought up by scheme actuaries, god bless 'em all, and they are largely welcome to them. Contracting out, equal treatment (equalising GMP benefits!), transfers, LP1 and divorce are happily left with them. Minimum Funding Requirement (MFR) will not be an issue for most schemes until 1998 or 1999, even if we all want to know what our level is now! And disclosure requirements should be dealt with by the normal good husbandry operating in well-run schemes - for that matter so should an ongoing review of trustee procedures.

But back to DAMIT.

Dispute Resolution is very straightforward. The regulations set out the procedure in detail and all that is left for the trustees to do is decide who should be the first point of complaint - usually the poor pension manager. We have tried our literary hands at producing workable procedures and have specimens available.

New contracts for Actuaries, Auditors, Advisers (on investment) and Advocates (Scottish for lawyers). In all cases ask them to produce their own drafts. Then the hard work starts. If the nine-page treatise from one of the major consultants is anything to go by, a lot of reviewing is to be done. The authorities are hopeful to see contracts in place between trustees and their sponsoring companies for the provision of pension administration services. However, this is not a requirement of the Act and can conveniently be put into the pending tray until general practice is clear (and specimen contracts are readily available).

In virtually our schemes the employer has decided to opt out of the requirements of the Act in appointing MNTs. This is not suprising. If an independent trustee is in place it is likely that considerable though will already have gone into the construction of the trustee hoard. This will normally have ensured a good presentation. Having set in place a structure likely to be regarded as satisfactory there will clearly be a desire to retain it. (As it happens we are finding the thought of going into the MNT problem is leading to a much increased level of enquiry for our services.)

An interesting problem where no answer has yet been found, is the treatment of Life Cover Only members. Do you include them in the consultation or not? A wrong decision just might be awkward in the future if the level of objections is close to the magic 10%. What if it is 9%, but would have been 11% if fewer members had been consulted?

Reactions to the Statement of Investment Principles are much more diverse. Some schemes have adopted relatively simple two/three-page summaries whilst, at the other extreme, one employer has refused to consider the statement until a full scale asset/liability modelling exercise has been conducted to determine the risks associated with MFR. Surprisingly, our preference is for the short approach. We have even written one and contributed to several more.

Finally, trustee procedures. Compliance is the one area many schemes will need to work on. Otherwise the Act's requirements are no more than good business practice and a well-run scheme will already be doing all that is needed. One quaint little point. Since you need to ensure that all trustees are notified of meetings you will need to keep a record of all trustees who have been informed each time a meeting is to take place. Ah well, more work for idle hands.

Custodians

The Pensions Act, in Section 47 (3) provides that trustees are liable for civil penalties if they rely on the "skill or judgement of any person who is appointed otherwise than by the trustees to exercise a prescribed function". The regulations include custody of cash, securities and any other documents of title as a prescribed function.

So trustees must appoint their custodians - at last. We have been arguing for years that trustees should have a direct legal relationship with their custodian, not an indirect one via the investment manager.

But the wording is precise. For the appointment of investment managers it refers to " by or on behalf of the trustees" - in other words the manager can, on behalf of the trustees, delegate part of the function, e.g. in some overseas markets, to another party. But the wording for custodians omits the "or on behalf of". Trustees must have written agreements with whoever has the custody of their assets which, on the face of it, includes all sub-custodians.

We have referred the matter to the DSS, who confirm the interpretation of the regulations but point out that "there is nothing to prevent [the custodian] from delegating some of his tasks to another person but he cannot delegate the responsibility. If the appointed custodian decides to use a sub-custodian for some of the assets (for example, overseas investments) then the appointed custodian would remain responsible for the actions of the sub-custodian".

Some custodians guarantee the performance of their sub-custodians, usually subject to some in extremis get-out clause; many do not. They may no longer have an option. It would appear that the only way for custodians to avoid responsibility for the actions of their sub-custodians in respect of pension funds subject to the Act would be for every board of trustees to have formal agreements with every sub-custodian, which is clearly impractical.