Fool's gold?; Barely a month goes by in which the nation's pensions

PENSIONS. And crisis. The two words are so often seen together these days that they seem to have become virtually synonymous.

The problems facing the sector are the result of a dangerous cocktail of factors including the damage wrought on share prices by the three-year bear market, the shortsightedness and complacency of pension fund trustees and large employers and, of course, the fact that we are all living much longer.

To complicate matters you can throw in a new accounting rule, FRS 17, which kicked in this year and requires companies to be much more open about the financial health of their occupational pension schemes and, of course, the now infamous (pounds) 5 billion tax heist inflicted on the industry by Chancellor Gordon Brown at a time when the more naive among us assumed that the markets would keep going up and up for a generation.

The pensions timebomb, according to some observers, was already well primed in 1997 but it was the occupant of 11 Downing Street who effectively lit the fuse.

Harvie Brown, the Glasgow-based chief actuary at management consultants William M Mercer, said Brown's scrapping of tax relief on dividend income has turned out to be a very severe blow for the industry. Brown said: "We would have thought the government would help pension schemes but all they're doing is creaming off more tax. This means it will take schemes a lot longer to get back to a fully funded position."

Brown believes that the recent pensions white paper, released on December 17, was a missed opportunity. "It is tinkering around the edges rather than addressing the major issues," he said.

The seconds are ticking away fast. Figures by WM Company, the Edinburgh performance-measurement consultancy, show that UK pension fund asset values fell 13.9% in 2002. This is worse than was thought and raises the spectre that some large companies will be unable to honour their pension commitments.

Astonishingly the figures also show that, instead of retreating from equities as the world's stock markets plunged to historic lows, pension fund trustees were punting their pensioners money by becoming net investors in shares last year, pouring millions into the over- valued and volatile US market.

In a survey of more than 1,000 funds, WM found that, despite falling markets, pension funds' faith in the "cult of the equity" remained intact. The funds, controlling (pounds) 342bn, pumped a net (pounds) 3bn into equities in 2002. By contrast, they were net sellers of bonds to the tune of (pounds) 5bn. Almost half of the net investment in equities - (pounds) 1.4bn - came in the final quarter of 2002.

So who's to blame? According to reports last week, the real villains of the piece are the pension fund trustees, who are sometimes secondees from sponsoring firms, sometimes gifted amateurs and sometimes trade union representatives. Generally their knowledge of investment allocation is sketchy to say the least.

This has given rise to the suspicion that a cosy cartel of fund managers and actuarial consultancies have in some way learned how to exploit pension fund trustees' ignorance of the world of investment and persuaded them to put far too many eggs into the equities basket - even as markets were looking distinctly toppy as the dotcom bubble stretched in late 1999. After all, the fees are higher.

Trustees, who are usually unpaid, last week were revealed to have presided over a record annual loss of (pounds) 100bn on the stock markets last year. There's a view that for too long they have meekly bowed down to the advice of consultants and fund managers and coughed up when the bills came in, even though fees for fund management are seen as too high. However, it is company shareholders who must now carry the can and will need to find ways of bridging the funding gap.

One financially literate executive who sits as a trustee on a Glasgow pension scheme said: "The problem is a lot of trustees are quite amateur."

A key recommendation of the Paul Myners report into institutional investment was that pension fund trustees should take a more informed and involved attitude to investment decisions. He accepted that this would require a quantum leap in their calibre.

Then there is the thorny subject of whether trustees should be paid for their efforts. While it would be certain to raise their game and increase their professionalism, the payment of trustees is not widely popular as it would cost them their current status as prudent people who are effectively carrying out a civic duty. So they seem likely to remain as amateurs.

Gary Cullen, head of pensions at solicitors Maclay Murray and Spens, is concerned that this might enable professional asset managers to hold all the aces when sorting out fund management contracts.

He said: "The agreements are entirely one-sided. The fund managers are invariably indemnified, but it's almost impossible to get them to agree that the trustees should be. Fee scales in active management are high, and they can turn out to be extremely high when a fund is coping with losses of 20%.