UK Pension Funds Launch Governance Index

(October 16, 2013) — A group of UK-based pensions have joined forces to create a method of monitoring good fund governance.

Royal Mail Pension Plan, Telent, and Saul have linked with consulting firms Russell Investments and Spence Johnson to create the Russell Pensions Governance Index, an annual survey of how UK pension schemes organise their governance arrangements.

“The idea for the survey came from a desire to better understand the governance structures of others, as a context for decision making and formulating ideas,” said Chris Hogg, chief executive of the Royal Mail Pension Plan. “There is a spectrum of approaches out there with a lot of excellent governance structures. We wanted to dig down and capture some of this then share our findings so schemes can benchmark themselves. We hope it will be a catalyst for more industry-wide debate around governance issues.”

The index examines the governance of 90 UK schemes with a total of £243 billon of pension assets held on behalf of three million members. It analyses the characteristics of these schemes according to six measures around the extent to which they delegate, the costs they incur, and the nature of their trustees.

The consortium found that changing governance structures is high on the agenda for many schemes. Some 70% of large and 69% of mid-sized pension funds reported they were in “a process of change to improve the governance” of their fund.

They also found there are clear economies of scale in governance. The consortium said: “As a proportion of assets, large schemes face a cost that is less than half that of smaller schemes in our survey. The average cost for large schemes is 5.4 basis points, for mid-sized ones 9.7bps and for small schemes 13.0bps. For small schemes achieving scale to make their aspirations affordable is a key challenge.”

Sorca Kelly-Scholte, managing director for client strategy and research at Russell Investments, added:  “Schemes are facing many different challenges, with mid-sized schemes for example facing a squeeze as they aspire to ambitious investment strategies but do not necessarily have the resources to adopt them. We hope that this index will be a useful addition to the body of resources available to schemes as they decide which model of governance is most appropriate for them.”

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