Background: Myners Review
In 2000, Gordon Brown (then the Chancellor of the Exchequer) was concerned about the relative lack of entrepreneurial enterprise in the UK. His suspicion was that that this might be due, in part at least, to the conservative way that institutional investments were made in this country and lack of funding available to would-be entrepreneurs. So he commissioned Paul Myners, chairman of a fund management firm (Gartmore) to investigate this issue.
We believe that Paul Myners did a great service to the pensions industry in this country by widening his remit considerably. Rather than focusing on the issue of the availability of venture capital, he covered the way in which institutional investments (particularly pension schemes) were governed.
His review, ‘Institutional Investment in the United Kingdom’ was published on 6 March 2001. It is long (200 pages), but in our view it is well written and easily accessible. You can download the entire report here. You may find the 18-page summary worth a read even over a decade later.
The original “Myners Principles”
Within the review, Myners set out principles that he believed to be best practice for the governance of pension schemes. Following consultation, the Government published its response to the review, which included a voluntary code for pension scheme investment based on those principles. There were ten principles for defined benefit schemes and eleven principles for defined contribution schemes. We have included links to both sets.
While these principles were not legally binding, they were intended to be a short common-sense statement in plain English of the basic principles of investment for pension schemes. Trustees were expected not to take legal advice on interpretation of fine details, but rather to seek investment advice to ensure they kept to the spirit of the principles. Pension schemes were encouraged to adopt the principles as best practice, or to explain why an alternative approach has been taken, and are expected to publicly disclose their adherence or otherwise.
In our view, the Principles reflected Paul Myners’ background. They were written very much with large schemes in mind. Whilst we agreed with almost everything in the original report, many of the Principles could never be justified from a cost / benefit standpoint for a sub £50 million scheme (for example regarding activism or investigating transaction costs).
The revised “Myners Principles”
In 2007 the Government asked the National Association of Pension Funds (NAPF) to assess the extent to which:
- pension fund trustees were applying the Myners principles;
- scheme governance and the quality of trusteeship had improved; and
- whether key gaps identified in a previous review had been addressed.
The Government accepted the NAPF’s principal findings and recommendations. In particular, it agreed that the Principles would be more effective if Government and industry developed more flexible and high-level voluntary principles, rather than prescribing how pension funds should manage specific aspects of their business. They also set up an independent Investment Governance Group under the chairmanship of The Pensions Regulator, to enable the pensions community to take responsibility for the content and implementation of the principles and associated guidance and best practice.
The new Myners Principles for defined benefit schemes
Principle 1: Effective decision-making
- Trustees should ensure that decisions are taken by persons or organisations with the skills, knowledge, advice and resources necessary to take them effectively and monitor their implementation.
- Trustees should have sufficient expertise to be able to evaluate and challenge the advice they receive, and manage conflicts of interest.
Principle 2: Clear objectives
- Trustees should set out an overall investment objective(s) for the fund that takes account of the scheme’s liabilities, the strength of the sponsor covenant and the attitude to risk of both the trustees and the sponsor, and clearly communicate these to advisers and investment managers.
Principle 3: Risk and liabilities
- In setting and reviewing their investment strategy, trustees should take account of the form and structure of liabilities.
- These include the strength of the sponsor covenant, the risk of sponsor default and longevity risk.
Principle 4: Performance assessment
- Trustees should arrange for the formal measurement of the performance of the investments, investment managers and advisers.
- Trustees should also periodically make a formal policy assessment of their own effectiveness as a decision-making body and report on this to scheme members.
Principle 5: Responsible ownership
- Policies regarding responsible ownership are disclosed to scheme members in the annual report and Statement of Investment Principles.
- Trustees should adopt, or ensure their investment managers adopt, the Institutional Shareholders’ Committee Statement of Principles on the responsibilities of shareholders and agents.
- A statement of the scheme’s policy on responsible ownership should be included in the Statement of Investment Principles.
- Trustees should report periodically to members on the discharge of such responsibilities.
Principle 6: Transparency and reporting
- Trustees should act in a transparent manner, communicating with stakeholders on issues relating to their management of investment, its governance and risks, including performance against stated objectives.
- Trustees should provide regular communication to members in the form they consider most appropriate.
The new Myners Principles for defined contribution schemes
These were published in November 2010.
Principle 1: Clear roles and responsibilities
- Roles and responsibilities in relation to investment decision making and governance are clearly defined and communicated to interested parties.
Principle 2: Effective decision making
- Decisions relating to investment governance are taken on a fully informed basis and the investment governance processes are sound.
Principle 3: Appropriate investment options
- The investment options provided take account of a range of member risk profiles and needs and are designed appropriately.
Principle 4: Appropriate default strategy
- An appropriately designed investment strategy is offered for members who prefer not to make a choice.
Principle 5: Effective performance assessment
- The performance of investment options is monitored.
Principle 6: Clear and relevant communication to members
- Clear information on the investment options and their characteristics that will allow members to make informed choices is provided.
We believe that both revised sets of principles are a big improvement compared to the originals. However, we feel that some aspects of the defined benefit principles are still unsuitable or irrelevant for small schemes (e.g. Principle 5).
There is helpful guidance and a trustees’ toolkit on The Pensions Regulator’s website. We have an included a link here.
Although there may be instances where you believe that it is not appropriate to follow the principles, we believe that trustee boards ought to document how they adopt the principles, and an explanation of any non-adherence. We suggest that this be contained within your scheme’s Statement of Investment Principles.