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Tuesday, 6 March, 2001, 11:42 GMT
Timid fund chiefs 'fail investors'
A pensioner collects her pension at the post office
The pensions industry faces radical reform
Holders of pension plans are being failed by the timidity of fat cat City investment gurus, a government investigation has revealed.

A culture that "seeks to avoid conflict" is leaving pension fund managers unwilling to criticise poor profitability in firms they have invested in, the inquiry found.

Yet the fund managers are "highly paid to make such judgements", the investigation's final report said.

"The review is particularly concerned by the value lost to institutional investors through the reluctance of fund managers to engage actively with companies in which they have holdings, even where they have strong reservations about strategy."

Herd instinct

The inquiry, commission by the Treasury, also criticised pension fund strategies which promote an "instinct to herd" among investment managers.

The benchmarking of a fund's performance against that of competitors is "mistaken" when a scheme should seek primarily to meet pensioners' needs, the document warned.

"Members of a scheme can take little comfort from discovering that their fund has beaten the returns of the peer group average if the result is below the level required to product the pensions that they expect."

By comparing growth against stock or bond indices, such as the FTSE 100, a scheme's board is encouraging managers to hold poorly-performing shares.

"[Managers] may hold stock which they believe will underperform the index, but which they need to hold in order to reduce the risk of significant deviation from the index," the report said.

"In this situation, pension funds are paying fees for active management when its true style is becoming increasingly passive, adding less and less value."

Cash spread

The report called for a shake-up of the industry, which has more than 800m under management, to encourage a broader spread of investment, and a clarification of fund strategy.

Mr Myners, an investment manager who led the investigation, also called for legal changes to allow pension funds to invest more easily in venture capital partnerships fostering start-up businesses.

And he urged the replacement of the so-called minimum funding requirement - a controversial solvency measure introduced after the Maxwell pension fund scandal - with a more flexible regime covering the reporting of accounts.

"Savers' money is too often being invested in ways that do not maximise their interests," said Mr Myners, chairman of Gartmore Investment Management.

"It is likely to follow too that capital is being inefficiently allocated in the economy. The review sets out a blueprint for change."

Trustees' skills

The review also calls for a review of the system which sees trustees who are largely unpaid and unsupported charged with ensuring that a scheme is receiving good value from its fund managers.

"We often make wholly unrealistic demands of trustees. They are being asked to take crucial investment decisions, yet may lack the resources or the expertise."

Almost two thirds of trustees have no professional qualifications in finance or investment, a survey for the report found.

It also calls for reforms in the "far from transparent" way fees from stockbrokers and dealers are passed on by fund managers.

The Treasury said Gordon Brown, chancellor, would respond to the "important" report in Wednesday's Budget.

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