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At the recent National Association of Pension Funds conference Sir Paul Myners took another step in his mission to ...
At the recent National Association of Pension Funds conference Sir Paul Myners took another step in his mission to modernise. Cris Derby reports

Local authority pension funds were criticised by Sir Paul Myners for using 'peer group benchmarks', when he addressed the National Association of Pension Funds investment conference at Edinburgh last month.

The trail-blazing Myners report had recommended each fund set benchmarks specific to its own liabilities, rather than simply comparing itself with its peer group. Sir Paul said he was surprised so many funds were still using peer group benchmarks, especially in local authorities as this is an area where the government has greater ability to exert its influence.

He said funds should set 'scheme specific benchmarks' matching asset allocation, and accused trustees of focusing excessively on stock selection and rewarding managers for this rather than focusing on strategic asset allocation. He said strategic asset allocation was part of the new enriching role for trustees, which should encourage them to look at all asset classes.

Sir Paul emphasised the report's recommendation to look at investing in private equity, hedge funds, commodities and property. He said property was a seriously undervalued asset class, and trustees should be debating the issue, but he feared few funds would be doing so in the next three to four years.

He argued that trustees should get more active in share ownership. Although they are often uncomfortable about owning shares, they should engage and challenge fund managers. Managers often said they were underweight in a particular share but were not often asked by trustees why the share was being held at all. He praised PIRC and Hermes for their activity in this field.

Sir Paul reminded the audience that the cost of asset management was now known to be over£8bn a year. Trustees should engage in this and ask the right questions, but to do this they require more time and better training - particularly employee trustees. Although training had improved, more was still to do.

Sir Paul said all funds should now be stating whether they were complying with the Myners report's 'blindingly obvious' principles. Although the statements of compliance are voluntary, funds should state in their annual report whether or not they are complying, and if not, why not. Progress would be reviewed in March 2003.

He urged funds to pressurise managers on 'bundling' services. There should be full and frank disclosures of each cost. He again questioned the existence of soft commission and said commission recapture should go back to all clients, not just those who ask for it. There was also too much focus on cross subsidy rather than concentration on attaining real value from managers.

Sir Paul referred to the recent growth of Moms - managers of managers. Andrew Kirton, practice leader of consulting at W Mercer, explained how his firm was embracing the concept in its direct role with Attica - one of the newMoms. He admitted there were conflicts of interest, but they should be stated openly and managed.

Mr Kirton pointed out that clients had for some time been uncomfortable with consultants giving asset allocation advice and that was totally accepted.

Keith Neale, county treasurer for Essex CC won applause for saying the conflicts were too great: 'I want traditional independence. They must make their minds up what business they are in.' His call for traditional unbiased advice was echoed by other speakers.

London Pension Funds Authority chief executive Peter Scales chaired a tense session on the FRS17 accounting standard. Mary Keegan, chairman of the Accounting Standards Board said that, while the standard had been developed three years ago and issued 15 months ago, it was only now that the debate had started. Consultants had changed their minds on how assets should be valued, and the economics had changed in that time. It was about matching assets with liabilities. The standard changed nothing - it simply reported the volatility that was there.

Mr Scales concluded that many accountants had not understood the full impact of the standard and how it would be implemented: 'Accountants don't always explain themselves well, and they do need to explain this more clearly both to pensioners and to trustees.'

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