Rezworth Burchenson, Guest WriterIn March 2000, the Chancellor of the Exchequer commissioned Paul Myners to conduct a review of institutional investments in the United Kingdom and the impact of decision making on productivity.
Myners' conclusions, while at that time pertaining to the U.K., now have relevance for the Jamaican pensions industry, based on its J$150 billion size and importance to the national economy.
Myners concluded:"The review finds that savers' money is too often being invested in ways that do not maximise their interests." This thinking is prevalent in the Jamaican context, where members continually comment that "this pension business is run to benefit only the company or sponsor".
Whether or not this was true in the past, every effort must be made to change this mindset.
The main distortions identified by the Myners Report were:
"Many pension fund trustees lack the resources and expertise to make investment decisions; "Due to the lack of investment knowledge, trustees rely for advice on a narrow group of investment-consulting firms, whose performance is not usually assessed or measured; "Fund managers are often set objectives which give them unnecessary and artificial incentives to herd. Risk controls for active managers are increasingly set in ways which give them little choice but to cling closely to stock-market indices, making meaningful active manage-ment near impossible;Unnecessary incentives
"Vagueness about the time over which fund managers' performance is to be judged creates unnecessary incentives for short-termism. Also, trustees informally assess fund managers based on short-term performance without regard to long-term performance and assess allocation decisions, based on their own risk tolerance and not based on the demographic profile of their membership; "Fund managers are reluctant to intervene in companies where they own substantial shareholdings, even where this would be in their clients' financial interests, resulting in insufficient shareholder activism in underperforming listed companies to create greater value for members; "An important cost, namely broking commission and other income, is subject to insufficient scrutiny, especially in large integrated financial conglomerates where one division would transact at prices not reflective of the overall market." Also, these hidden fees are not separately disclosed to the trustees.Fortunately, Part Two and Three of the Pensions (Superannuation Funds and retirement Schemes) Investment Regulations, 2006, have already captured some elements of these concerns, namely the Statement of Investment Policies and Principles.
The Jamaican Pensions Act and regulations mandate that a pension fund's rate-of-return objectives and risk tolerances must be stated and a periodic review of appointed agents, namely investment managers, conducted annually.
The recommendations of the Myners study proposed:
"Trustees should measure the effectiveness of their own decision making, and of the performance of advisers and managers; "The use of paid, independent trustees should be encouraged as they bring an additional level of transparency to the board of trustees; "An assessment of the skills of trustees should be undertaken and whatever gaps identified, remedied with additional training; "The attention devoted to asset allocation decisions should fully reflect the contribution they can make in achievingthe fund's investment objective; "Appointed agents, especially investment managers, should be apprised of the time period over which they will be assessed; "Decision makers should consider a full range of investment opportunities across all major asset classes;Underperforming companies
"Fund managers are encouraged to engage the management of underperforming companies if they are of the view that the engagement will raise the value of the investment; "In addition to the disclosure of all fees, all soft commissions/rebates should be discouraged."Said Myners: "The principles may seem little more than common sense. In a way they are - yet they certainly do not describe the status quo. Following them would require substantial change in decision-making behaviour and structures."
Many of the changes proposed require raising the level of expertise and skill set of each board of trustees over the medium term.
While these recommendations are by no means exhaustive, it is hoped they would stimulate discussion as the Jamaican pensions industry seeks to benchmark to international standards in an effort to foster the growth of an important source of long-term capital.
Rezworth Burchenson is managing director of Prime Asset Management Limited and a Sunday Business guest writer on pensions. Email: rburchenson@primepensions.com
