Gordon Brown’s HM Treasury set up what became the Myners Review because of growing concern that the behaviour of institutional investors might be holding back growth
Key points
- The Myners Report was published in March 2001
- The report followed concerns over how investors such as pension funds were investing
- It set out a set of voluntary ‘comply or explain’ principles to be adopted by pension trustees
Jane Marshall takes a look at the impact of the Myners Review two decades after it was published.
At the start of the century, Labour chancellor Gordon Brown was concerned that the behaviour of institutional investors who owned much of British business - pension funds and insurance companies - might be holding back growth by ignoring start-up companies in favour of listed companies. Were they perhaps too risk averse in comparison with US institutions for example? In his 2000 budget Brown therefore announced that a review of UK institutional investment would be undertaken. It was to be led by Paul Myners (now Lord Myners), a former chief executive of investment manager Gartmore.
The report was published in March 2001 after a consultation process that had included a formal consultation document, workshops and interviews. It was much wider than the original remit had perhaps implied. As Myners himself said, in order to answer the question of whether there was a bias against investment in smaller companies it was necessary to consider whether investment decisions were rational, whether they were well informed and whether there were incentive effects which might distort decision making.
Myners identified a number of weaknesses in investment decision making and did not pull his punches. In a talk to the Faculty of Actuaries in 2001, he commented that an industry with assets of £900bn under management should not be managed in the same way as a churchwarden or scout group would. He was particularly critical of the level of training many trustees received in investment matters, which left them unable to challenge or engage effectively on asset allocation or the management of funds. Research carried out with the help of National Association of Pension Funds (NAPF), the body now known as the Pensions and Lifetime Savings Association, had found that the average trustee spent 12 hours a year on asset management issues.
The Myners principles
Having identified weaknesses, the report set out a voluntary set of principles for good investment decision making, to be adopted by pension trustees using the ‘comply or explain' principle.
The key principle related to effective decision making. Decisions should be taken only by those with the skills, information and resources to take those decisions effectively. Trustees should consider whether they had those skills and organise themselves to acquire them if they had not.
A number of other recommendations complemented this overarching principle. Trustees should set clear objectives in relation to their own scheme's liabilities rather than benchmarking to other funds or to a market index. Much greater attention was needed to strategic asset allocation, including consideration of asset classes they may previously have dismissed (such as private equity). In order to reduce incentives to herd among investment managers, Myners recommended that steps should be taken to reduce the reliance on a few consulting firms. Trustees should hold separate competitions for actuarial advice and investment advice and agree explicit mandates with all investment managers they employed.
Performance measurement was also important, and managers therefore needed to understand the basis on which their performance would be measured. Research had demonstrated that trustees were often unaware of the costs of investment and this needed to change so that they understood those costs, including any commissions. Other recommendations included greater emphasis on shareholder activism, and greater transparency in a strengthened Statement of Investment Principles.
Myners found no risk aversion among pension schemes as such, but concluded that if the suggested principles were adopted and acted on rational, informed investment decision making could be improved.
With the benefit of hindsight, these recommendations seem only common sense, and there was broad support for them.
Critical response
But the Report was not without its critics. Some recalled the early 1980's, when there had been concerns that future Labour governments would seek to direct pension investments. Others worried about increased costs of governance and compliance, and in particular the impact on smaller schemes with fewer resources. Critics warned that it was the last straw for final salary schemes. Many were concerned that the report would see a move to professional trustees, or that the move towards greater professionalism and training would increase the liability of lay trustees. And there were those in government who doubted that a voluntary system would be sufficient to encourage the changes in behaviour that it felt were needed.
As a result, although government accepted the report, it did so with the proviso that a further assessment be made by HM Treasury after three years. When the review was published in December 2004, it found that change had happened, but not as much as it had hoped. Among its conclusions was that some form of independent assessment of scheme compliance was desirable.
But things do not stand still, and the background under which UK workplace schemes were operating was changing.
The Pensions Act 2004 introduced a much tougher regulatory regime. The industry became used to regulatory codes, anti-avoidance powers and clearance procedures. The concept of the employer covenant was formulated and trustees' responsibilities in funding and corporate activity extended. Many more private sector final salary schemes were closing and the move to defined contribution was accelerating.
When the NAPF was asked by government in 2008 to conduct a further review into investment decision making, it was clear that in these changed circumstances there was no appetite for wholesale change which might increase compliance costs (such as the independent assessment proposal mooted by government). The principles espoused by Myners had been accepted, compliance and good practice were increasing and the emphasis on greater trustee training, knowledge and understanding had been reinforced in the Pensions Act 2004. What was needed rather than radical change was a streamlining of the Myners principles with more practical guidance. Responsibility for overseeing compliance with and development of them was transferred from HM Treasury to The Pensions Regulator (TPR) working with the industry. They are now part of a joined up regulatory system designed to improve pensions governance in both final salary and defined contribution schemes.
A watershed in governance
Was the Myners Report truly a watershed in pensions governance? Most definitely. It was not of course the only engine of change: the Goode Report established after the Maxwell scandal, the Pensions Act 1995 and the Pensions Act 2004 all explored governance issues and sought to apply solutions. Myners stands with these key moments in pensions governance in its clear exposition of issues affecting investment decision making, and its principles-based approach rather than rigid prescription.
With the perspective of the last 20 years, it is the persistence of the issues raised in discussions around the Myners Report that is as interesting as the report's specific recommendations. All still continue in discussions of pension scheme governance.
For example, some remain convinced that lay pension trustees are not equipped to govern pension schemes given the increasing breadth of their responsibilities and the complexity of the legal, corporate finance and investment issues with which they are confronted. They believe that there should instead be a wholesale move towards requiring or at the very least encouraging professional trustees. Debate around the likely impact of the Pension Schemes Act 2021 and the potential risks for trustees makes this point again.
That in turn raises questions about the independence of advisers and trustees. As the consolidation of consulting firms continues in the face of the decline of traditional defined benefit schemes, will we see herding behaviour based on what other schemes are doing rather than what is suitable for the particular scheme? Will it become more difficult for professional trustees who need a good working relationship with the regulator to resist regulatory pressure? Conflicts may become more problematic. And what about smaller schemes? Can they be properly run given the complexity and advice burden required?
Could the role of trustees change so that they simply become the agents under which regulation is enforced giving more certainty about the standards expected but less flexibility to trustees and sponsors? Or is a principle-based system more suited to the traditional notion of trusteeship and the scheme specific funding regime contemplated by legislation?
In his 2001 lecture, Myners quoted, with approval, a passage from Giuseppe di Lampedusa: "If we want things to stay as they are, things will have to change".
That sentiment has operated so as to improve pension governance. Only time will tell whether it has done the same for the health of underlying workplace pension provision.
Jane Marshall is a director of The Pensions Archive Trust
This article was first published on The Pensions Archive Trust's website, pensionsarchive.org.uk, and is reproduced with kind permission
