Dec 2008-Jan 2009
Should the ‘Myners Report’, published after the dotcom crash, have prepared pension funds for the crisis of 2008? By Angele Spiteri Paris
When the final figures for 2008 pension fund returns are revealed, the numbers are likely to be more diverse than ever before. To what extent trustees are in the black or in the red may depend on how closely they followed the advice that sprang from an influential report commissioned by the UK government, Institutional Investment in the United Kingdom: A Review.
Headed by Paul Myners, now Lord Myners (pictured), the government’s minister for financial services, he was at the time the chief executive at Gartmore, a UK-based fund manager.
The report, published in 2001, is largely responsible for putting hedge funds and private equity onto the pension fund landscape.
Known as the Myners Report, it was a response to the dotcom crash that left pension funds with huge deficits after years of surpluses and the report reverberated beyond just the UK to Europe. It recommended ten principles (see box) that centred mainly on pension scheme governance and to an extent the 2008 crisis is the first real major test of the more robust pension fund structures that the report strove to build.
But poor investment returns would not necessarily be a sign that either the advice in the report was wrong or that pension funds had failed to follow it, say some observers. Marcus Hurd, a senior consultant at Aon Consulting, a pension fund consultancy, says the crisis is so deep that pension funds will suffer no matter how well they implemented the principles drawn up by Myners.
“A lot of what Myners said was sensible, but the bottom line is that if the equity market drops by 50% in a year, which is pretty much what it has done, then actually all of those niceties don’t really help.”
On the other hand, good governance could lead to better performance.
Lindsay Tomlinson, vice chairman at Barclays Global Investors Europe, says: “The Myners principles are really more about fund governance than about investment performance. There is some evidence globally that well-run funds perform better, but nothing that points to individual principles.”
Marek Siwicki, head of consultant relations at Gartmore, says: “I think a number of pension funds just paid lip service to the principles and did not really abide by the spirit of what Myners was trying to achieve.
“Those that really took on board the principles and devoted more time to the strategic asset allocation and implemented more robust targets around their scheme in a number of areas would have seen benefits.”
John Hopwood, the CIO at Cambridgeshire County Council Pension fund, says: “The Myners Report had no effect on our investment strategy and hence was no help in weathering the storm… The principles that were drawn up in the Myners Report were the
sort of principles we were adopting anyway.”
Yet in the case of Cambridgeshire this response should be expected and it might even prove the case for strong pension fund oversight. After all, not every scheme can boast its own CIO. This is the type of governance that Myners sought to establish in other pension funds, or at least to imitate with the help of professional advisors. With stronger governance structures like Cambridgeshire’s, more schemes would probably adopt Myners-style principles.
Setting the standard
Mike Taylor, chief executive of the London Pension Fund Authority (LPFA), says that the Myners Report did not help the LPFA directly with the 2008 crisis, but adds: “I think the main thing Myners did was stress the need for trustees to be trained and briefed and we’ve done that.”
So it seems that although some professionals think the report was of little consequence when it came to pension fund investment returns in 2008, others feel it was something of a catalyst for practices that may nevertheless have helped in some way with performance.
John Belgrove, a principal at Hewitt Associates, a pension fund consultancy, says: “The most relevant principles are those relating to effective decision-making, clear objectives and the ones around risk and liabilities.”
He adds: “What you will see this year is a massive dispersion in results from different pension schemes like we’ve never seen before. That is down to the degree to which schemes have taken up advice to mitigate their risks and to diversify some of the return ideas they had in place.”
If there is one area where the report did affect investment decisions rather than just decision-making processes, it was probably in the realm of alternative investments. Myners called for pension funds to consider greater diversification with the third principle in the Myners report saying: “Decision-makers should consider a full range of investment opportunities, not excluding from consideration any major asset class, including private equity. Asset allocation should reflect the fund’s own characteristics, not the average allocation of other funds.”
Subsequent reviews of the report further called for a deepened focus on liquidity and risk awareness and mitigation. This, coupled with advice from consultants, led some pension funds to select liability-driven investments (LDI), and this was arguably a great benefit. Pension schemes that hedged out their liabilities by adopting LDI strategies fared better than those with more traditional portfolios of equities, a number of consultants report.
Jim Connor, partner at Morse, a management consultancy, says: “In the wake of the steep decline of most investments, funds which elected to hedge liabilities will be ahead of the game at this point.”
One scheme that reaped success was the Friends Provident Pension Scheme (FPPS). The move means that the scheme has had a lower proportion of its assets invested in equities, which has protected its capial base, while the LDI part of the scheme has moved broadly in line with expectations.
The fund embarked on an LDI strategy to reduce its exposure to inflation risk and interest-rate volatility. Andrew Neilan, trustee director and scheme secretary at FPPS, says: “Investing in LDI was not a tactical investment for us.
“Anyone who had equity investments has suffered. What has been helpful to us is that we had a lower proportion of our fund invested in equities. Our LDI investments are designed to stabilise the changes in the assets versus liabilities position in our scheme.”
Todd Ruppert, president and CEO of T. Rowe Price Global Investment Services, says: “The principles espoused in [the Myners] report encouraged more professionalism in strategic asset allocation and governance decision-making and in delegation to experts where appropriate. To this extent, it should have helped. Those that used the report as a true guide, rather than a simple ‘tick the box’ exercise are sure to be better off than they would have been.”
But Ruppert also feels that seven years down the line, broader regulatory events may have superseded the report. “With all due respect to Lord Myners’ good efforts, solvency legislation and accounting rules have had more of an impact on asset allocation, and the unprecedented vortex of external factors bombarding us that have defied predictability are overwhelming the impact of
©2008 funds europe