treasury is set to introduce legislation to enforce recommendations of the myners report
Pension trustees will gain more flexibility in their ability to dismiss investment managers, following the introduction of legislation based on the Myners Report issued earlier this year.
Over the next year, the Treasury will move to introduce legislation to enforce the recommendations of the Myners Report, although it has made some amendments from the original proposals, including suggestions on the higher standard of care for trustees.
The Government intends that trustees will be required to ask detailed questions about the commission arrangements and the broker selection process.
The legislation is to be drafted in order to counter soft commission arrangements, where pension funds make undisclosed payments to brokers unrelated to specific services, one of the biggest concerns Myners identified in his report.
Myners argued that the payment of soft commission was damaging performance of pension funds and made investment processes opaque.
Bridget Boyle, equity partner at Watson Wyatt, said: 'The difficulties faced by small schemes have been recognised in the proposed legislation. There is a more flexible attitude to transaction costs than originally recommended by Myners.'
Boyle also pointed to the fact that a proposal in the original report protecting fund managers from dismissal because of poor performance has been amended. She explained that the response from Government now meant that trustees could dismiss investment managers even if they had not breached the mandate.
Changes to be introduced include a requirement to set overall investment objectives linked to funds' liabilities and an increased level of expertise from trustees. A clear mandate will need to be agreed between trustees and fund managers including a time scale over which investment performance will be measured.
Trustees will be required to ask a series of questions of pension fund managers including the level of share dealing and what actions have been taken to reduce costs.
They will be required to ask how much commission was paid from the fund by the fund manager, how they have changed over time and what the fund manager has done to negotiate improvements.
A code of practice will be introduced voluntarily at first but the situation will be reviewed in 2003 and if the code is ignored, legislation may be introduced enforcing the code.
Still, some argue that the extra burdens imposed by the proposed changes are unnecessary and will not eradicate the problems.
Paul Haines, investment partner at actuaries Lane Clark Peacock, said: 'The cost and bureaucracy to pension funds will increase. It is naÃ¯ve to expect problems to disappear, someone still has to be held responsible for choosing the fund manager.'
10 question trustees should ask managers
1. How much commission was paid from our fund by you during the relevant reporting period?
2. How do commission rates compare to, say, five years ago? What have you done to negotiate improvements in commission rates?
3. What is your best view of the level of other transaction costs (such as market impact and opportunity cost) borne by our fund during the reporting period?
4. Please explain any major differences between the level of costs incurred by you on our behalf and the level of costs incurred by our other managers.
5. Which dealing venues did you choose for our portfolio, and why?
6. Which brokers did you deal through and how did you select them?
7. Where you are not using an execution-only broking service, please list other services that you buy or benefits that you receive from the broker concerned
8. Explain how you use new dealing techniques, technology or alternative trading venues to reduce our costs ' and your future intentions in this respect.
9. Explain your rules on entertainment of your staff by brokers and those with whom you transact on our behalf where we bear the cost.
10. If you wish to make a case for soft commission arrangements, explain how our interests are better served by the broker providing you with services rather than securing lower commission costs for us.
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