LONDON -- "If it ain't broke, don't fix it. But the occasional checkup won't hurt."
That likely will be the message the U.K. pensions industry will send this month to a government-led inquiry into institutional investment.
Consultants, trustees and investment managers will be responding to a consultation document published in May by Gartmore Chairman Paul Myners, who was asked by Gordon Brown, chancellor of the exchequer, to find out why U.K. pension plans invest relatively little in venture capital compared with U.S. pension plans.
It would seem, however, that Mr. Myners has used this review as a chance to kick the tires of the institutional investment industry. The review raises 40 questions for discussion, ranging from the role of trustees and consultants in decision-making to the impact on the investment markets of index tracking.
A number of respondents are likely to first take issue with the premise of the government's inquiry.
Figures used by the Treasury in the introduction to the review indicate U.S. pension funds invest as much as 5% of total assets in venture capital, compared with 0.5% by U.K. plans. Some consultants plan to dispute this, saying the investment in venture capital by U.S. funds is much lower.
Statistics from Pensions & Investments' directory of the 1,000 largest U.S. pension funds show less than 3% of assets are in private equity, which includes venture capital.
"And why should there be a problem if pension plans don't invest much in venture capital?" said Paul Haines, investment partner at actuaries Lane, Clarke & Peacock, London.
He believes that so long as Trust Law, the use of trustees and the prudent investor principle remain at the heart of the way U.K. pension plans operate, little can be done to change how investment decisions are made.
Andrew Kirton, head of U.K. investment consulting for William M. Mercer, said trustees often have limited time and resources to consider alternative asset classes such as venture capital and private equity.
But the prospect of low inflation and lower returns from equities in the future is likely to encourage more trustees to invest in venture capital in the hope of improving returns on fund assets, added Mr. Kirton.
Leading U.K. plan sponsors don't think pension plans need to sharply increase their investment in venture capital and would block any attempts by the government to coerce them into doing so.
"The idea that trustees are risk averse is shamefully wrong. Most pension plan trustees invest up to 80% of their funds in equity," said Geof Pearson, secretary to the 3 billion ($4.5 billion) Sainsbury Pension Fund. The fund's sponsor, Sainsbury PLC, London, had not yet decided whether it and the pension plan would respond jointly or separately to the review, he added.
The plan has no direct exposure to venture capital. It does, however, have indirect holdings in venture capital investment trusts through its U.K. equity positions.
Trustees were put off investing directly in the asset class after a bad experience in venture capital during the mid 1980s and early 1990s when Britain went through a recession.
"We have been there, bought the T-shirt and we didn't quite like the experience," added Mr. Pearson.
The plan would reinvest in venture capital if it saw a profitable opportunity, he added, not if it felt compelled to do so.
Investors might be discouraged from venture capital partnerships because a portion of the assets is often in unallocated cash, he said. In many cases, only 75% of the assets allocated to venture capital would be used at one time with the remainder held in cash, diluting overall returns, he said.
The 5 billion Greater Manchester Pension Fund, Ashton-under-Lyne, Lancashire, also intends to respond to the review. Late last year it decided to commit 3% of total assets to venture capital but has still to fully invest the money, said Peter Morris, assistant director of finance.
"It is quite an administratively demanding process. The reasons other pension plans don't invest is because the reward of the investment may not be worth the risk of the asset class," he said. The size of the plan means it has sufficient resources to invest as much as it intends in venture capital. Small pension plans, however, often are not so fortunate.
Trustees for the 18 billion Post Office Pension Scheme, London, decided to respond individually to the issues raised in the review, said Pension Director Gerry Degaute. There was too broad a range of opinions to merit only one response, he said.
He plans to point out to Mr. Myners that the strictures of the minimum funding requirement -- requiring U.K. pension plans to provide a minimum level of funding and ensure their assets match their liabilities -- discourage pension plans from investing in private equity.
His pension scheme, one of the largest in the United Kingdom, has a target for investment in private equity, both seed capital and later-stage financing such as management buyouts, of 3% of total plan assets.
Ian Armitage, head of Mercury Private Equity, a division of Merrill Lynch Asset Management, London, thinks the review might help iron out misunderstandings about private equity, which might be one of the reasons pension funds have been reluctant to invest in startups.
Alan Rubenstein, head of the National Association of Pension Funds' investment committee, said the association was putting finishing touches on its submission. The government was looking for "some very serious answers" on this issue, he said.
Mr. Myners' review is on the web at www.hm-treasury.gov.uk.