LONDON - Most U.K. pension executives accept employees as plan trustees, but are reluctant to make them full partners in the investment process.
Member trustees are expected to become a reality for the entire British pension universe in the next Parliament. The queen's speech, slated for Nov. 16, will lay out the government's legislative priorities for the coming year - including a major pension bill that likely will require all retirement plans have at least one-third of their trustees, with a minimum of two slots, filled by plan participants.
Already, about two-thirds of U.K. pension funds have at least some form of employee representation, according to a survey by consultants Bacon & Woodrow, London, although just more than half have the minimum one-third participant representation proposed by the government.
"We certainly feel they add value," said Hugh Brown, head of pensions at Imperial Chemicals Industries PLC, Welwyn Garden City.
The idea of any power-sharing is anathema to U.S. pension executives. Many American pension executives fear that giving employees a say in the investment of pension funds would lead to more conservative investment postures or even socially oriented investments.
The issue is loaded. When Rep. Peter Visclosky, an Indiana Democrat, tossed in an amendment in 1989 legislation that would have mandated joint trusteeship of U.S. pension plans, pension executives saw red and threatened the demise of their defined benefit plans.
If asset mixes were more heavily weighted to lower-returning bond strategies, pension executives in both countries say their corporations will end up picking up the tab to their defined benefit plans.
In the United Kingdom, the push for mandating member trustees stems from the late Robert Maxwell's plundering of his companies' pension funds. Many British pension experts came to believe member trustees would provide a valuable safeguard for pension assets. Maxwell plans did have member trustees, however; the problem was that Mr. Maxwell fired those who disagreed with him or promoted labor trustees to management roles.
Amending a recommendation in the U.K.'s Pension Law Review Committee, the Department of Social Security backed mandating that all retirement plan trustees be composed of at least one-third participants and retirees. Participants would have to be given at least two slots, except for plans with fewer than 100 participants.
The problem for U.K. pension executives is that the white paper would have required participants to vote on whether they were satisfied with current arrangements, many of which permit employers or committees to nominate participant representatives. Employers warned putting the procedure to a vote would have been costly and cumbersome.
William Hague, minister for Social Security, recently indicated employers will not have to disturb current arrangements that already provide participant representation, unless an unstated proportion of employees object.
For many pension executives, that statement provided welcome relief. Mike Stockwell, manager of employee benefits for the 450 million ($730 million) Kodak Ltd. pension fund, Hemel Hempstead, said the company can live with the rules as long as the government continues "to back off." Four of Kodak's nine trustees are participants, but are elected by a company-created panel.
Trustees' interests aligned
While some British employers, particularly among smaller companies, resist the notion of having member participants, U.K. pension managers on the whole are comfortable with the idea.
"We have not experienced any difficulty whatsoever in the 11 years in which we've had member trustees on the board," said Peter White, group pensions manager for Tate & Lyle PLC, Bromley. The 480 million fund has an equal number of employer- and employee-nominated trustees on its 10-member board.
U.K. pension officials believe member trustees provide added security for participants, a valuable contribution to the management of their plans, and greater confidence of workers in decisions that are made.
Experts say that both participant and management trustees' interests are closely aligned. "I can't think of any times when there was any polarization," said ICI's Mr. Brown of his fund's 13-member board. The board includes six management trustees, six employee trustees and one independent trustee.
But the government's proposal would enhance the role of trustees, particularly on investment matters. The white paper clearly states that all advisers - including money managers, the actuary, auditor, lawyers and administrator - will be instructed by the board and not by the employer. In addition, trustees might get a more powerful say on the division of pension surpluses between employers and benefit increases.
Trustees will be responsible for their funds' investment policy, and will be guided by a prudent investor rule. Disturbing to some U.K. pension experts is that trustees will have to consult the employer on investment matters - but will not have to reflect the employer's views.
This issue, on top of mandatory cost-of-living adjustments and new minimum solvency rules, might drive U.K. companies with U.S. parents to shift to defined contribution plans, according to consultants at Towers Perrin, Newbury.
Some non-U.K.-based multinationals will take the opportunity to switch to defined contribution plans on the back of the regulation, but U.K. employers already are adopting member trustees to get ahead of the legislation, said Richard Malone, European policy director for Sedgwick Noble Lowndes, Croydon.
Participants' say limited
In reality, U.K. trustees tend to have relatively little to say about investment matters in many companies. Many British pension executives do not believe they will have to change their arrangements under the proposal.
Trustees "do not get involved in the day-to-day" management of the pension fund, said Alan Herbert, head of pensions at the 6.5 billion British Petroleum Co. PLC, Hemel Hempstead.
Rather, asset mix decisions are debated at the fund's investment committee, which is composed of two senior BP officials and four top-level investment professionals, including the top executives of Robert Fleming Group and property manager MEPC PLC.
At the internally managed 4.5 billion ICI pension fund, there also exists a separate investment committee. Trustees "do attend as observers, so effectively they are members, because we very rarely vote," Mr. Brown explained. Instead, the committee operates by consensus.
At the 900 million Vauxhall Motors, the Luton-based subsidiary of General Motors Corp., the investment function is entirely delegated to a separate entity, GM Investment Trustees Ltd., which has the responsibility for asset allocation and hiring external managers.
With the pension proposal as discussed, Vauxhall probably won't have to make any changes in its trustee structure, said Dennis Sheehan, treasurer. "I don't see (member trustees) being a problem."
Even where trustees do have a larger say over investment matters, they tend to follow the wisdom of those with investment experience on the board, several experts said. Participant trustees "tend to defer on investment issues," said Tony Thurnham, a partner with the law firm of Linklater & Paines, London, who advises a number of pension boards.
Virtually all interviewed said participant trustees have proven themselves to be diligent students and hard workers, and some praised the questions they raise at trustee meetings.
Participant trustees "have proved particularly willing to ask questions of investment advisers," said Tate & Lyle's Mr. White. Plus, they "demand a reply in terms they understand," he added. "That of course clarifies the issue for everybody."
Pension plans' maturation
Now, with the U.K. government planning adoption of minimum solvency rules and pension managers becoming more aware of their plans' growing maturity, British pension funds may seek more conservative investment postures anyway.
The 1.5 billion J. Sainsbury PLC Pension & Death Benefit Scheme, London, is awaiting the results of an asset-liability study that is due in January that might lead to changes in the fund's investment approach, said Geoff Pearson, pensions manager. A lower equity exposure is possible.
Now, the fund has 70% of assets invested in a balanced portfolio with Mercury Asset Management, while the remainder is in three specialized stock portfolios and real estate.
The focus on trustees' duties is heightening their awareness of their responsibility for investment matters.
"It will be interesting to see whether the employee trustees are more conservative or not," Mr. Pearson said.