By Ruth Alexander Small pension schemes are likely to be disadvantaged under Paul Myners' proposals...
By Ruth Alexander
Small pension schemes are likely to be disadvantaged under Paul Myners' proposals for instituting a statement of investment principles for occupational pension schemes, according to Simon Martin, principal and actuary at Aon Consulting.
In Myners' review letter to the Government last week, he said defined benefit pension funds should be required each year to issue a transparency statement about their investment strategy. This would then be subject to external scrutiny by the members, the public and Opra.
Trustees of smaller funds, which Myners defines as schemes of 4,000 members, which equates to a fund size of about £250m, would have to obtain approval on the statement from the scheme's actuary. This document would state that the actuary believed the investment assumptions were such that a financially sophisticated person might reasonably make.
Martin questioned why it is that smaller funds would be required to fulfill an additional layer in the production of the statement, and noted that as it stands, the proposal would add more burdens to small pension schemes, which would be very expensive in practice. He said: "To deal with both in different ways is neither important nor practical. The security of your pension benefits should not be dependent on the size of the scheme you are in.
"It is true that there are more problems with small schemes but as Myners himself points out in his report, there are more small schemes in existence than large schemes. It is pleasing to see the proposal is very much up for consultation. Myners' is a deluxe model, and the industry needs to talk further and come up with a more practical compromise. Trustees need to give members more information, but at a cheaper price. The Myners report is great in principle; it just needs more work on its detail."
The process of having to prepare the transparency statement is intended to force trustees to think carefully about whether their investment strategy is sound. Each defined benefit fund would have to define the current value of its assets and in what asset classes they were, as well as the assumptions used to determine its liabilities. Planned future contributions would also be made clear in the statement, as would asset allocation.
Martin questioned the inclusion of this information in the statement, saying a pension scheme's profile might suddenly change if, for example, there were a large number of redundancies to take account of.
According to Myners' review letter, the statement would contain a justification by the trustees of the reasonableness of both their asset allocation and the investment returns assumed.
An explanation of the implications of the volatility of investment values for possible underfunding would also be necessary, as well as a justification by trustees of why this level of volatility is acceptable.
Martin said the volatility of an asset class' returns is difficult to calculate with present technologies. He doubts that a member would benefit from a justification of volatility levels as they can not be predicted, and any statement issued on the subject would be broadly similar to that from any other schemes.
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