Publications

Bulletin 17 Winter/Spring 2000

Professionalism

A recent report by consultants Frank Russell has suggested that slow decision taking and poor investment knowledge by trustees could be costing up to £3.7 billion a year in lost investment earnings.

They considered seventy different "barriers to excellence" by trustees, including such things as unclear and inconsistent thinking, a tendency to be over-cautious, over-loaded agendas, inertia and the need for consensual decisions. The conclusion was that poor management by trustees led to a 50 basis point drop in investment performance.

Similar points were made at an FT conference last year where an investment manager argued that "the key problem is that trustees are responsible for the assets, but are not experienced. Consultants are experienced, but not responsible for the assets. This will persist for so long as trusteeship is the last bastion of amateurism." This is reminiscent of a regulator who, in the wake of Maxwell, said "in Whitehall it is regarded as important that we have experts on tap. In pensions it should be important to have experts on top." Sadly that was not reflected in the resultant legislation.

It is not for us to suggest that all trustee boards should include a professional independent trustee. We have always argued that all trustees should be independent in outlook and professional in conduct. How they achieve that is for them to determine; but at least someone has now attempted to quantify the cost of not doing so.

Disability Discrimination Act

Last year the Department for Education and Employment commissioned a study into how pension schemes treat disabled people following the introduction of the Disability Discrimination Act 1995.

The results were fairly reassuring for occupational pension schemes. No evidence was found of widespread systematic exclusion of disabled people. Their disadvantage in scheme membership largely resulted from their wider disadvantage in access to pensionable jobs.

There was, however, evidence of restricted access to ill-health retirement and death benefits, particularly in schemes where some/all of the benefits are underwritten through insurance companies.

The commonest restrictions are those relating to late joiners, due to concern that employees, having not joined a scheme initially, might choose to do so only after an illness or disability has become apparent. Half of the schemes examined operated on exclusion because of concern about adverse selection against the scheme, often at the instigation of the insurers who underwrote the benefits.

More common was the restriction of access to some benefits e.g. ill-health retirement. These restrictions were generally imposed on grounds of excessive cost and/or inability to insure.

Views were sought by the Department on proposals to amend the relevant DDA provisions. On the suggestion that, where benefits are restricted members' own contributions should be reduced, respondents thought that this militated against the generally accepted principle of pooled risk.

A second option: to require equal access to all disabled people, sharing the cost across all members, received general acceptance as regards initial scheme entry - equal access was generally already offered. But concern was expressed regarding the need to retain the option for health screening of late entrants, again on grounds of cost and adverse selection.

The third proposal was that, where eligibility criteria could not be met, the employer's contribution should be available for a personal pension. This was the least favoured option both as a result of administrative cost and also because the eligibility requirements of private schemes would, if anything, be stricter than for occupational schemes and the benefits were likely to be lower.

Concentration of Investments

There has been much comment recently concerning the risk associated with very large holdings in just a few companies - BP Amoco, Vodafone etc.

We have all heard it "...more invested in one stock than in the whole of the US" etc.

The suggestion is that this is a new phenomenon and that we should do something about it, redefine the benchmarks, create new indices, make more work for consultants.

That this is new is refuted in a study by the London Business School in association with ABN Amro.

Market concentration at the end of the century is shown to differ remarkable little from that at the start, only the names have changed.

In 1900, the top 10 companies comprised 36% of the market - exactly the same as today. We may be concerned that just three sectors, telecoms, banks, and oil and gas, together make up almost half the market. But a century ago railways did it on their own.

In terms of relative position the change has been enormous. The bank sector is the only one to maintain its position - second to railways at 15% of the market in 1900 and second to telecoms at 16% of the market today. The largest sector, telecoms, has increased over seven times from the 2.5% represented by telegraph and telephone in 1900 - perhaps a less significant change than might have been imagined.

On the more general issue of long term returns, the study confirmed what we are used to hearing each year from the Barclays Equity-Gilt Study; that over most long-term periods, equities have been the best investment. It did suggest, however, that early equity returns, 1918 to 1935 in the Barclays study, had been overstated. Also the inclusion of an earlier period of poor returns, prior to and during the first world war reduced the returns over the entire century substantially - sufficient to lower returns by 2%p.a.

Whether real long term equity returns have actually been 8% or 6% in the past is interesting, but of less relevance than what they might achieve in the future. At least either figure is sufficient to comfortably satisfy the actuaries' assumptions.

Reminder

Statements of Investment Principles must be amended to include references to Socially Responsible Investment and the exercise of votes by July at the latest.

Trustees Powers of Delegation

The Law Commission, in a report entitled “Trustees' Powers and Duties", has made recommendations for a range of reforms to trust law that may impact the way that many pension schemes operate.

One of the recommendations, which is included in a draft Bill attached to the report, is that " the trustees' delegable functions consist of any function other than (a) any function relating to whether or in what way any assets of the trust should be distributed…”

As part of the practical day-to-day management of their scheme, most trustee boards delegate to some extent in respect of pension payments, payments of lump sum death benefits, commutations etc. Even if the trustees retain all authority in respect of the allocation of benefits, they invariably delegate functions "relating to" the payment of benefits.

As currently drafted, this Bill would inevitably interfere with the smooth running of schemes and BESTrustees pointed this out in a response to the Law Commission on behalf of The Association of Corporate Trustees.

The Commission's reply was not encouraging ". . .a very important element of our policy is that, notwithstanding the wide powers of delegation we propose, trustees should not be able to delegate their powers and duties to distribute trust assets unless the trust instrument gives them express powers to do so."

It is particularly important, for trustees to be able to delegate, for example in 'exceptional circumstances of serious ill-health' where the Inland Revenue will permit full commutation of benefits. Almost by definition, in such cases time is of the essence.

It seems to us a pointless and unnecessarily costly exercise to be forced to amend trust deeds in order to continue doing something that already works well.