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