Government Welcomes Myners Report On The Corporate Governance Of Life Mutuals

Paul Myners today published his report on the corporate governance of life mutuals commissioned by the Treasury in March 2004.

The Government welcomes the report, which provides a thorough analysis of the issues, and a proportionate and pragmatic set of recommendations. The review builds on the work of Sir Derek Higgs on corporate governance and complements the reviews by Sir Derek Morris, Paul Myners and Ron Sandler in improving the efficiency of the investment chain which links savers and the businesses in which they invest. The issues identified by Paul Myners in this report concerning the influence of members of life mutuals echo those he considered in the review of institutional investment for members of occupational pension schemes.

Paul Myners’ report recommends adoption by life mutuals of the Combined Code on corporate governance, which has been annotated to reflect the circumstances of life mutuals. The annotations serve to emphasise the importance, in the life mutual context of greater transparency and accountability in the boardroom, formal performance appraisal, proactive support for non-executive directors and closer links between non-executive directors and mutual members. Complementary proposals aim to foster accountability by life mutuals to their members and to other market monitors through promoting better member relations and disclosure of relevant information.

The Government believes Paul Myners recommendations will encourage the success of the sector and protect the interests of its members. It calls on the mutual life sector to begin implementing the recommendations put forward by the review now. The Financial Secretary to the Treasury, Stephen Timms MP, plans shortly to meet industry leaders to affirm this message.

The Government will be reviewing the impact of implementing the proposals after two years after the Code comes into effect.

Stephen Timms said:
“Mutual life offices are an important part of the UK’s financial services sector, providing a home for the savings of nearly 10 million members. The way in which these organisations are run is important to the overall health of the economy as well as to the financial well-being of the individual policyholders concerned. The challenge for life mutuals – and in particular its representative bodies – is to build on the momentum of this report to drive forward the review’s recommendations. The Government is now looking for life mutuals to respond.”

Notes to Editors

1. Following the Report of the Equitable Life Inquiry, led by Lord Penrose, the Government asked Paul Myners to conduct an independent review into the governance of mutual life insurance offices in the UK.

2. The review’s full terms of reference were to:

Consider the governance framework for mutual life offices in comparison with that for comparable companies (and, where relevant, for listed companies).
Where appropriate, bring forward recommendations to ensure that boards of mutual life offices are as accountable to their members as boards of comparable companies are to their shareholders.
As part of this, the review will examine:

The level of member involvement in the governance of mutual life offices;
Board accountability for mutual life offices; and
The level of regulation by the FSA to which mutual life offices are subject.

The review will consult as widely as possible, taking into account the recent experience of other mutuals in this area in developing its conclusions and recommendations.
Since the governance of mutual life offices has much in common with that of other mutual societies, where appropriate, the review may also develop general governance principles for other types of mutual (taking into account the particular characteristics of other parts of the mutual sector).
The review will deliver a report with recommendations by the end of 2004.

3. Paul Myners produced a consultation paper in July 2004. Over 70 responses were received, the majority of which are available publicly on the Treasury’s website. Three substantial pieces of research were commissioned by the review. Copies of the report and associated research can be obtained from the review’s website at www.hm-treasury.gov.uk/myners. Hard copies can be requested from the HM Treasury enquiries unit by e-mail: enquiries@hm-treasury.gov.uk or on tel: (020) 7270 4558.

4. The Government’s analysis of and approach to the investment chain was set out in the Pre-Budget Report 2004, and an updated version is at Annex A for ease of reference.

The Higgs Review can be found here
The Sandler Review can be found here
The Myners principals: review of progress can be found at http://www.hm-treasury.gov.uk./media/DCB/53/myners_principles_web.pdf
The Morris Review can be found at http://www.morrisreview.org.uk/

6. Media enquiries should be directed to Will Straw at the Treasury press office on 020 7270 4420.

7. Non-media enquiries should be addressed to the Treasury Correspondence and Enquiry Unit on 020 7270 4558 or by e-mail to public.enquiries@hm-treasury.gov.uk.

8. This press release and other Treasury publications and information are available on the Treasury website. If you would like Treasury press releases to be sent to you automatically by e-mail you can subscribe to this service from the press release site on the website.

Annex A: The Investment Chain

1. UK institutional investors manage almost half of UK equities, investing much of the long-term wealth of British savers and exercising indirect control and significant influence over much of British industry. But this ownership is intermediated through an ‘investment chain’ of relationships connecting ultimate owners with their investment in companies. Ensuring this chain works efficiently is of vital economic importance for productivity and long-term growth, because the chain is a critical mechanism for ensuring that investment is efficiently allocated.
2. The chain is complex: in pensions, for instance, pension fund trustees - stewards on behalf of pension fund sponsors and members - are themselves advised by investment consultants; assets are in turn invested through fund managers and brokers with whom companies have crucial relationships; and companies’ financial statements are verified by auditors acting on behalf of shareholders – such as pension funds.
3. Since the 1998 Pre-Budget Report, the Government has systematically investigated how well the investment chain works, notably through the Myners review of institutional investment decision-making, and the Sandler and Higgs reviews. The interim assessment of Sir Derek Morris’s review further strengthens the analysis of the investment consultancy market, which provides key advisory services to pension funds and investment institutions. Paul Myners’ review of the governance of mutual life insurance offices has identified improvements in disclosure and accountability to members. These reviews have identified critical and inter-connected areas where the chain has not been functioning as well as it should, including its various principal-agent relationships.
4. For example, issues identified at the “owner” end include:

as the Myners review of institutional investment decision-making identified, pension fund trustee boards are, in general, weak customers. Typically unpaid, part-time and with little in-house investment support, many pension trustees themselves lack the necessary investment expertise to act as strong and discerning customers of the investment consultants and fund managers who sell them services;
a number of problems that have resulted, including poor evaluation of advisers and their advice; a reliance by trustees on a small number of investment consultants, supplying actuarial and investment advice bundled together; insufficient resources devoted to the process of asset allocation; unclear contractual structures which generate strong and unnecessary incentives for herding and short-termism in investment; and insufficient focus on the potential for adding value through active shareholder engagement; and
as Ron Sandler’s review identified, competition in medium and long-term savings tends to revolve around access to distribution and product tax features, rather than superior underlying investment performance. Moreover, consumer understanding of what drives long-term investment performance is itself weak, and the advisers’ minimum standards of knowledge on investment issues are also low. As with pension funds, therefore, incentives for efficient and innovative investment management are weaker in the retail market than they could be.

5. Issues identified at the “company” end include:

Sir Derek Higgs’s review identified substantial scope for improvement in the UK’s corporate governance regime, in the role and independence of UK non-executive directors, and in the responsiveness of UK boards to the concerns of shareholders; and
the Coordinating Group on Audit and Accounting highlighted scope for improvement in the UK’s audit regulation framework, the approach to auditor independence and the enforcement of accounting standards.

6. The complex interactions between the issues at different points in the chain mean that each needs to be addressed if the overall goal of promoting more efficient approaches to investment is to be realised. In response to this analysis and the recommendations made by the reviewers, the Government has undertaken a programme of reform. In particular:

to improve the quality of trustees’ investment decision-making processes, and the way they interact with their advisers and fund managers, the Government endorsed the ‘Myners principles’ as a voluntary best-practice framework. The new Pensions Act 2004 will require trustees to have appropriate knowledge and understanding of investment matters, and the Occupational Pensions Regulatory Authority is currently developing a detailed code of practice to provide trustees with guidance;
the Government’s assessment of progress made against the Myners principles after two years shows that, while behaviour is beginning to change, progress is lagging in key areas. The Government is therefore proposing changes to the principles designed to: strengthen trustee expertise; ensure more effective use is made of advisers; improve the quality of asset allocation activity and the resources devoted to it; and provide greater clarity on funds’ investment time horizons. And it will work with key stakeholders to improve the quality of the commentary trustees make on how they are implementing the principles;
to tackle the problems of retail product complexity, poorly informed consumers, and adviser conflicts of interest, the Government has worked with the Financial Services Authority (FSA) to develop a suite of simplified and more transparent products, which should increase the focus on investment performance. More generally, new FSA rules will enhance disclosure to consumers of the cost of the advice associated with a packaged product;
the bundling of actuarial and investment services by investment consultants has been addressed by Myners’ recommendation that trustees should tender separately for actuarial and investment advice. Sir Derek Morris’s interim assessment reinforces Myners’ analysis that the lack of expertise among pension fund trustees and the bundling of actuarial and investment advice are both key problems in the investment consultancy market;
to promote more active engagement on the part of shareholders, in exercising their rights particularly where they have concerns about management, strategy or performance, the Government welcomed the Institutional Shareholders Committee principles in October 2002, and the commitment to reflect these principles in fund management contracts and insurance fund practice. The Government will be reviewing their impact on engagement shortly. Shareholders now have an advisory vote on directors’ pay, through the Directors’ Remuneration Report Regulations. The Government is also working closely with the Shareholder Voting Working Group to improve the efficiency of the shareholder voting process;
the role and independence of UK non-executive directors, and their responsiveness to shareholders, will be strengthened by the revised Combined Code on Corporate Governance, which incorporates Sir Derek Higgs’s recommendations, and Sir Robert Smith’s proposals to improve the way the audit committee works. Progress will be reviewed after two years;
the independence and operation of mutual life office boards, the scope and quality of their disclosures to members, and their accountability to members, are to be strengthened, to levels similar to those of comparable proprietary companies, following proposals from the Myners review of the governance of mutual life offices;
the quality and transparency of information flows along the investment chain – vital if owners are to act effectively - have been significantly improved. For example, the Government has reformed the regulation of the audit profession, enhanced audit transparency and auditor independence and strengthened the scrutiny of financial reporting. From April 2005, listed companies will be required to produce a forward-looking Operating and Financial Review of their business environment. The FSA is developing with the industry a rigorous transparency regime for broking transaction costs.