PRINT THIS PAGE UK: Aftermath of the Myners report02/11/2005. Source: SJ Berwin. Richard Watkins
On 6 March 2000 the Treasury-commissioned Myners Report set out recommendations and key investment principles for improving decision-making in the pension industry to make it easier for life insurers and pension funds to invest in venture capital, says SJ Berwin. So what has happened since then? Government measures to strengthen commitment to venture capital
On
6 March 2000 the Treasury-commissioned Myners Report set out recommendations and
key investment principles for improving decision-making in the pension industry
to make it easier for life insurers and pension funds to invest in venture capital.
Following a consultation, the Government warmly welcomed Myners' recommendations
and announced that new legislation would be introduced to develop and implement
them. Five years have now passed since the Myners Report was published. In November
2003 the Treasury launched a progress review and published its findings and further
recommendations in December 2004. It is therefore an ideal opportunity for Private
Equity Bulletin to take stock of the impact of the Myners Report.
Myners'
recommendations
By way of a reminder, Myners' key recommendations
included: - a set of principles for institutional investment decision-making;
- legislation to raise the duty of care for trustees to ensure familiarity with
investment matters;
- greater transparency in respect of transaction costs
including 'soft commission' and more investment in private equity through transparency
and tax changes; and
- adoption of the US Employee Retirement Income Security
Act (ERISA) principles, imposing a clearer duty on fund managers and trustees
to intervene in companies in the interests of shareholders and beneficiaries.
In
response the Government proposed to raise the standard of care for trustees, introduce
principles of shareholder activism and, in the context of a review of the financial
services regime, relax restrictions on trustees who are not themselves 'authorised'
to invest in private equity limited partnerships. In respect of Myners' proposed
principles for institutional investment decision-making, the Government decided
to rely on a voluntary scheme based on the principle of 'comply or explain'.
Government review
In its review the Government found evidence
that many of the pension schemes surveyed had started to adopt the Myners principles
on a voluntary basis, using them to formalise their internal decision-making processes.
The review, however, also identified areas where progress had been poor, and therefore
recommended that a number of Myners' recommendations should be further strengthened.
Trustees' expertise of investment matters was still found to be lacking. The Government
has therefore proposed measures to improve such expertise amongst trustees. In
particular, provisions in the new Pensions Act will impose strict requirements
on pension fund trustees to have an appropriate knowledge and understanding of
funding and investment issues. The Pensions Regulator will enforce this requirement,
whilst the Occupational Pension Regulatory Authority will develop further guidance
for trustees.
In practice, the chair of the board will be responsible
for ensuring that pension fund trustees have the requisite knowledge and understanding.
Pension funds with more than 5,000 members will also be required to demonstrate
a minimum level of expertise: one full-time 'expert' must be appointed and at
least one third of trustees should have an appropriate level of understanding
of investment business.
The Government also identified a continuing lack
of clarity in the role of trustees and their advisers. To encourage better use
of investment advisers the National Association of Pension Funds is reviewing
its guidance for contracting with consultants in institutional investments.
In the meantime, the Financial Services Authority is also carrying out a consultation
on unbundling costs and restricting 'soft commission' to provide greater clarity
about which services and goods can give rise to commission payments. It has also
issued guidance on when research is separately chargeable. Furthermore, in the
context of its review of the Financial Services and Markets Act 2000, the Government
is relaxing regulations to encourage both the effective use of advisers and greater
involvement of trustees. These measures, together with greater trustee expertise,
should encourage more efficient use of advisers by pension funds.
Additionally,
the review highlighted that more steps are needed to ensure that institutional
investors improve their resourcing and asset allocation. It therefore recommends
that expert investment advice should formally be split into advice about strategic
asset allocation and the selection of appropriate fund managers.
To encourage
greater shareholder involvement by fund managers and trustees, the Government
no longer plans to adopt US-style principles but proposes to require trustees
and fund managers to comply with Institutional Shareholder Committee (ISC) principles.
In particular, trustees and fund managers would have to accept the ISC principles
relating to the responsibilities of shareholders and agents, and ensure that these
are actually incorporated in fund managers' mandates.
In practice, trustees
would have to check that fund managers have formulated policies on when they will
intervene in a company on behalf of the shareholders and beneficiaries, and how
long any such intervention in a company is likely to last.
To enhance
transparency, the Government has also proposed to introduce a voluntary independently
commissioned report on the implementation of the principles of decision-making
by trustees, and has already set up a working group to develop proposals.
Although many players in the industry have started to adopt Myners' recommendations
on a voluntary basis, their implementation still varies significantly across the
industry. The Government therefore continues to strengthen measures to encourage
effective and efficient decision-making in the pensions industry with a view to
making it easier for life insurers and pension funds to invest in venture capital.
Shared competence - Trustees' expertise
"The
new Pensions Act will impose strict requirements on pension fund trustees to have
an appropriate knowledge and understanding of funding and investment issues." - Lack
of clarity about the role of advisors
"The National Association of Pension
Funds is reviewing its guidance for contracting with consultants in institutional
investments. The Financial Services Authority is also carrying out a consultation
on unbundling costs and restricting 'soft commission'." - Shareholder
involvement
"Trustees and fund managers will have to accept the ISC principles
relating to the responsibilities of shareholders and agents, and ensure that these
are actually incorporated in fund managers' mandates." - Greater transparency
Richard
Watkins is a partner in the private equity team at SJ Berwin LLP. He can be contacted
on: T +44 (0)20 7533 2659 E richard.watkins@sjberwin.com.
SJ Berwin is a pan-European law firm with a particular focus
on private equity. It has offices in London, Frankfurt, Munich, Berlin, Madrid,
Paris and Brussels. If you would like further information on our services to the
private equity industry please contact Simon Witney in our London office 020 7533
2222 or visit our website at www.sjberwin.com
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