LONDON, 22 August 2005 –  Government proposals to require 50% of pension fund trustees to be member nominated rather than employer nominated, coupled with changes to pension regulations that make it increasingly difficult for Company Directors and “insider-trustees” to manage conflicts of interest, could lead to a brain drain of valuable investment expertise from UK trustee boards.   This is according to Aon Consulting, a leading pensions, benefits and HR consulting firm, who predict that if this legislation comes into force, it could cost UK pension schemes more than £7.5 billion per annum in lost investment opportunities. 

According to industry estimates, the total assets invested in UK pension schemes are around £750 billion.  Aon Consulting predicts that if schemes dedicated more time and effort to investigating and implementing more sophisticated asset class structures, they could potentially squeeze out up to 1% per annum extra return (the equivalent of £7.5 billion per annum across the industry) without significantly increasing the level of risk. 

Member-nominated trustees bring a valuable perspective to trustees boards, but usually do not have a financial background and so find it difficult to gain a thorough understanding of all the investment aspects of the pension scheme within the time that they have available.  This issue will become more pronounced unless the proposed legislation is revised.   Furthermore, Aon Consulting argues that latest Government proposals to include 50% member-nominated trustees will have an adverse impact on a key aim of the Myners Review, which was that ‘…Decisions should be taken only by persons or organisationswith the skills, information and resources necessary to take them effectively’ and that ‘Decision makers should consider a full range of investment opportunities, not excluding from consideration any major asset class…‘

This problem is made worse by the attitude of the new Pensions Regulator, who is issuing guidance which makes it hard for senior company representatives, who often do have substantial financial understanding, to remain as trustees.  The Regulator is expecting trustees to behave towards the sponsoring company in the same way as a lending bank – forming an independent view on the credit worthiness of the company and negotiating aggressively on contributions.  This puts a company director who is also a trustee in a very difficult position.  In consequence a number of financially acute people have left trustee boards.

Marek Siwicki, Senior Investment Consultant at Aon Consulting said: “In my experience member-nominated trustees do look to those with greater financial expertise on the trustee board usually senior company directors, and often the finance director.  As the Pensions Regulator is forcing senior company people off the trustee board, the level of financial understanding of boards is going down.

“This will lead to many trustee boards following the more established investment strategies, with which they can claim familiarity, but which will not necessarily provide the optimal level of investment returns.”  

Notes to Editors

About Aon

Aon Corporation ( http://www.aon.com ) is a leading provider of risk management services, insurance and reinsurance brokerage, human capital and management consulting, and specialty insurance underwriting. There are 47,000 employees working in Aon's 500 offices in more than 120 countries. Backed by broad resources, industry knowledge and technical expertise, Aon professionals help a wide range of clients develop effective risk management and workforce productivity solutions.

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