Trouble in pension land

by BBC News Online's Emma Clark

For many, the pension fund industry is still an arcane feature of the City, synonymous with pin-striped suits and grey-haired men.

Barring the antics of fund manager Nicola Horlick and the Equitable Life scandal, the industry keeps a low profile in the mainstream media.

Nicola Horlick raised the industry's profile

But recently the government has directed its reforming zeal at private pensions, amid an awareness that the state can no longer afford to support its workers in retirement.

The industry has come under "a two-pronged attack", says Andrew Green, a European Partner at the consultancy William M. Mercer.

"On the one hand, there are the poor underlying stock markets... coupled with the increasing imposition of government-sponsored watchdogs."

New rules

As a result of the government's scrutiny, fund managers and pension trustees are struggling to cope with a wave of new guidelines and contentious rules to raise standards.

The government is partly concerned with ensuring there is "sufficient rigour for running pension fund assets as is given to running businesses", says Mr Green.

Gordon Brown lays down the law on pension reform

It is also anxious to encourage the reinvestment of pension assets into the UK economy, he adds.

A lot of the emphasis has been laid on increasing the expertise of the trustees, who look after company pension schemes and are responsible for appointing fund managers.

"Trustees are going to have to cope with more compliance which requires additional work, possible additional costs and certainly additional time," says Mr Green.

Chancellor Gordon Brown is also pushing through new legislation to give pension funds a fiduciary duty to watch over the companies they have invested in.

This will force fund managers to take more seriously their power to influence decisions at some of the biggest companies in FTSE share index - and indirectly the workings of the UK economy.

Landmark case?

In this new climate of accountability, the trustees of the Unilever pension fund have decided to take their former fund managers to court this week for under performing.

The battle between Unilever and Mercury Asset Management - now part of Merrill Lynch Investment Managers - could prove a landmark case.

Unilever case could set a precedent

Unilever's recourse to legal action after Mercury failed to hit targets set by the pension fund is fairly unprecedented.

Usually, pension funds just fire their managers and hire a new one if they are unhappy with performance.

Should Unilever be successful in its action, other pension funds, such as the J. Sainsbury pension scheme, are said to be considering similar lawsuits.

"They are definitely some who will be watching, who will be unhappy with the performance of their fund managers," says David Gould, director of investment management at the National Association of Pension Funds.

Stock market turbulence

Trustees are also being pushed into a hard-nosed position by falls in the stock market.

No one likes to see the value of their assets decrease

David Gould
NAPF

According to Mr Gould, this has become the "biggest single driver of change" in terms of making trustees more aware of their responsibilities.

"No one likes to see the value of their assets decrease," he says.

In particular, the markets have drawn attention to the level of risk undertaken by companies in running a portfolio of assets for their employees.

New accounting rules mean that hits in the pension fund could affect the sponsor company's profit and loss account.

This mix of market and regulatory pressures has caused considerable disquiet in the industry.

George Harvey, head of UK institutional fund management at Baring Asset Management, says the government is in "danger of over-engineering" the industry if it enforces too many changes.

Although he lauds efforts to raise standards and educate trustees, he says the government needs to consider the ramifications of introducing too much "red tape".

Shifting the blame

Behind the scenes many companies are considering switching employees from a final salary pension scheme to a defined contribution (DC) plan.

The DC pension basically allows companies to shirk responsibility for under performing assets by transferring the risk to employees.

Families may find they don't have enough to retire on

Many in the industry believe the DC scheme is a scandal waiting to happen, once employees reach retirement and realise they have not accrued enough money to survive on.

Mr Green argues that the pressure on the industry applied by the government could "act as a catalyst" for companies to embrace the DC model.

"At the end of the day, it doesn't remove risk, it simply transfers risk - and this is not good for employees," warns Mr Green.

It is not entirely surprising that the industry is baulking at the government's new order, including rules designed to protect pension holders.

However, the government may be wise to pay heed to some of the industry's misgivings.