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Minister acts on pensions, Kelly demands radical change in City investment management

Jill Treanor, The Guardian

October 15, 2003

Financial secretary to the Treasury Ruth Kelly is to summon leading figures in the pensions industry to a top-level meeting to demand radical changes to the way in which retirement funds are managed by City firms.

Ms Kelly will issue the invitation in a speech tonight in which she will highlight the need for change in the relationship between investment consultants and pension fund trustees.

She will express her concern about the small group of consultants who advise trustees on how to invest funds and pick the City firms which invest funds on their behalf.

The financial secretary will highlight the role of the trustee and ask whether they have the correct skills to take decisions about investing funds that affect all members of a pension fund.

Ms Kelly will also question the seeming lack of attention paid by trustees to the way in which their funds are allocated among different asset classes, such as stocks, bonds and property.

The minister will call for evidence from fund managers that they are actively using their right to vote at company annual meetings.

Ms Kelly intends to use her speech to the Universities Superannuation Scheme, the country's third largest pension fund, to express her frustration at the slow pace of change in the pension and fund management industry since the Myners report two years ago.

The report, by the former fund manager and present chairman of Guardian Media Group Paul Myners, proposed a series of changes to the industry in an attempt to foster longer term investment in the stock market.

The government is conducting a review of the industry's progress two years later and will call on the industry to "engage" where more progress is needed if legislation is to be avoided.

Her aim is to tackle the traditional approach of the pension fund industry which focuses on the three-monthly performance of City fund managers. The government believes this fosters a short-term approach to investment decisions and hinders longer term development of firms.

Ms Kelly is expected to say: "Fund managers say that as long as clients insist on the right to terminate a mandate after any quarter's performance, then performance quarter by quarter is something that they have no alternative but to prioritise, even if the upshot is, as it must often be, lower investment performance over the long run, which ought to matter most to many clients. Such a mismatch of understanding cannot be efficient."

She will invite industry leaders to the Treasury for further discussions about how this vicious circle can be broken in order to encourage longer term investments.

It is understood that tackling the issue of investment consultants, a narrow pool of individuals, is one of the issues she aims to raise. She will ask whether there are barriers to entry for others wishing or able to offer advice to pension funds.

The government acknowledges that much work has been done by the industry since the Myners report and that some of it requires regulatory change.

Fund managers believe they have demonstrated their commitment to "activism" at recent annual meetings where they were able to vote on directors' pay for the first time. The Association of British Insurers this week published its first guidelines to members on voting at annual meetings.


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