LONDON - The U.K. government will rewrite provisions in the pensions bill that might stop British pension funds from hiring money managers based outside the European Union and not registered with British authorities.
As written, the bill might prevent U.K. funds from hiring some U.S.-based money managers - although most are registered with the Investment Management Regulatory Organisation.
The bill also could endanger U.K. pension investment in real estate and common investment funds. Companies with multiple plans use these common funds to pool assets to achieve greater efficiencies of scale and fee reductions.
In other key areas in the bill, which now is being considered by the House of Lords:
John Major's government also provided additional relief to the minimum solvency requirement, now called the "minimum funding requirement." It would allow use of bank guarantees, loans or securities as collateral in limited circumstances, plus promises to curb the power of trustees in setting contributions.
The government, however, was not persuaded to adopt an independent custody requirement for U.K. funds, despite efforts by Labour peers to tailor an amendment to meet previous objections raised by government ministers.
An effort to impose a minimum two-thirds representation of member-nominated trustees on defined contribution plans was defeated.
The issues were tackled last week during the report stage of the pensions bill in the House of Lords. The measure will go to its third and final reading chamber March 21, and is expected to be taken up by the House of Commons before Easter.
While many attach greater importance to the Commons' work, since that body can override any changes made in the upper house, the House of Lords provides an important debate on the major issues in the bill.
The announcement by Lord Mackay, minister for social security, that the government will draft its own amendment to deal with foreign-based managers and property investments came as welcome relief to pension executives and money managers.
Under the bill, trustees could not delegate full investment authority - and thus fiduciary liability - to any manager not covered by the Financial Services Act. Thus, trustees could be held liable for any actions by the manager, whether it be renegotiating leases or poor stock selection.
If unchanged, the bill could lead some trustees to avoid real estate investments. Most U.S.-based money managers who market in Britain, however, are registered with the IMRO and, therefore covered by the act.
But some firms might experience problems, warned the Earl of Buckinghamshire, who also is a director at R. Watson & Sons, Reigate, England.
Among U.S. managers not registered is Cadence Capital Management Corp., Boston. David Breed, chief executive officer, said his firm does not now manage assets for U.K. pension funds, but future prospects could be at risk. "Hopefully, more rational thought will prevail" as U.K. legislators get more deeply into the bill, he said.
Some pension experts thought the use of overseas managers had been addressed a month ago, but officials at the National Association of Pension Funds are convinced the problem has been remedied yet.
The pensions bill also threatens the continued use of common investment funds.
"Common investment funds are widely used by a large number of companies in the U.K. to efficiently manage their assets. To unwind those (funds) would be an unnecessary shame," said Andrew Dyson, senior consultant, William M. Mercer Ltd., London.
Lord Mackay said the government is drafting an amendment that "would make clear that subdelegation should indeed be possible. We are also looking carefully at the issue of whether delegation should be possible to persons who are fund managers in the context of common investment funds."
Other major issues that arose last week include:
Minimum solvency rules. The name change to "minimum funding requirement" reflects softening of the rules. That means they no longer ensure solvency all of the time.
Lord Mackay also said the government favored permitting employers to use bank guarantees, unencumbered loans or segregated securities as collateral if a fund's assets drop below 90% of liabilities, as long as the trustees approved. The measure would help companies avoid making immediate cash injections but would be temporary, lasting only until a 90% funding level was regained.
The government still rejected Labour proposals to drop the rules in favor of a minimum contribution system based on ongoing valuations and to adopt a "central discontinuance fund" for smaller plans of insolvent employers.
Custody requirement. Lord Mackay was not swayed by a redrafted amendment designed to spell out the role of the custodian and install regulatory authority with the IMRO. Nor did potential pension fund losses from cash deposited at Baring Brothers & Co. - since remedied by the purchase of Barings by Internationale Nederlanden Groep - cause him to swing in favor of a mandatory independent custody requirement.
Lord Mackay said a requirement might limit pension fund freedoms, add costs, and impose a regulatory burden that had not been justified.
Trustee rules. The House of Lords rejected an attempt to require member-nominated trustees comprise at least two-thirds of the trustees for defined contribution plans, while sticking with a minimum one-third requirement for defined benefit plans.
Baroness Hollis had proposed adopting the Goode committee's recommendation of two-thirds member representation in money purchase schemes after a previous effort to mandate at least 50% member representation for all schemes was rejected last month.
Lord Mackay argued that establishing two different minimum levels was impractical, given the variety of hybrid schemes, and complications involving additional voluntary contributions.