Gun-Shy UK Investors Take Test

Why do British pension plans appear to have an aversion to risk?

That is just one of the questions that the British government hopes to answer with a review into how U.K. institutions – largely pension funds and life insurance companies – allocate their assets.

Commissioned by Britain’s Chancellor of the Exchequer, Gordon Brown, and conducted by Paul Myners, chairman of Gartmore Investment Management, the review asks a broad range of questions concerning the role of trustees, the role of investment consultants and benchmarks.

A consultation paper was posted on the Internet at www.treasury.gov.uk and recommendations are expected back in time for the Chancellor’s budget in 2001.

“This is a broad review into institutional investment in the U.K. seeking to determine if decisions are being made rationally,” Myners said. “We’re attempting to understand how trustees manage risk, and that may help us to understand what is keeping them from investing in higher risk investments [like high yield and venture capital].”

For example, the typical U.K. pension fund invests approximately 0.5% of its assets in venture capital, whereas the typical U.S. pension plan invests roughly 10 times as much, or 5%, according to the consultation paper.

The paper then poses questions like: To what extent do supply issues explain the relative underdevelopment of the markets? And to what extent is investment in smaller asset classes discouraged by transaction costs and/or liquidity issues?

Regulation is one possible cause for caution, said Ken Ayers of The Frank Russell Co., an investment consulting firm. Among other things, there is the Minimum Funding Requirement, which is the method by which liabilities are valued and which takes into account only three asset classes: U.K. equities, U.K. bonds and cash. So in effect, funds are taking a risk if they invest in non-recognized asset classes.

Secondly, because pension trustees are responsible for other people’s money, they tend to be more cautious than an investor who is dealing exclusively with his own money, Ayers said, adding that this responsibility also leads to somewhat of a herd mentality.

“Pension fund trustees will tend not to want to be the first to do something,” he said.

However, Ayers points out that the idea that U.K. pension funds are morecautious than their counterparts in other countries is not necessarily the case. They tend to have a higher percentage invested in equities, he said, and might feel that the equity investments constitute enough risk.