DC Pensions - will they deliver good value?

Ros Altman recently (Ft, 21 Nov 2005) questioned the ability of defined contribution schemes to deliver good pensions. We think that one way to make sure that they provide at least a reasonable return would be to make it impossible for companies to offer better schemes to senior and/or top management.

Does the age of board members really matter?

Research by Peter Hahn at the Cass Business School shows that the average age of non-executive directors at the largest listed British 150 firms has remained at 58 for each of the past seven years.
We think that non-execs should be stripped of any statutory powers and seen as pure business consultants or advisers. Age or past accomplishments would become irrelevant and performance only would count.
At present, non-execs are selected by management itself and not by the owners of the business. Until someone can find a formula how this deficiency can be rectified, it would be better to do without all this pretend corporate governance bureaucracy.

Funny games at Volkswagen

The inability of VW's board to bring Chairman Piech to account over the share transaction with his family's Porsche AG underlines that the role of non-executive directors is in urgent need of reform. The German system of Co--Determination (where staff/unions control half the board seats) just is an extra complication. Board Members are easily turned into 'insiders' that are in the Chief Executive's or Chairman's pocket.

Bonds: A Guaranteed way to lose money?

Legislators and well-meaning regulators in various countries push pension funds to increase their allocation to fixed-interest securities. This is based on a narrow definition of investment risk, but one that unfortunately seems to appeal to the lawyers, accountants and actuaries that dominate the discussion.
It is correct to say that bonds are less risky if risk is defined as return of principal, - in nominal terms. The experience of the past 100+ years, however, has demonstrated that loss of purchasing power is a far greater risk to the preservation of capital.

Reality Check for Pension Fund Providers

European Pension Funds need a return of more than 8% a year to meet their obligations over the coming decade says a Financial News survey. We can only wish them good luck. Not that we think that this performance target is totally illusionary. We just think that it is not very prudent to construct the industry on the basis of these optimistic assumptions.
If the markets provide a positive surprise, fine. But do not promise your current and future pensioners payments that depend on fancy projections. Either the pensioners or your shareholders (who may have to make good any shortfall in the pension fund) will be disappointed.
Long-term equity returns consist of (1) dividend payments and (2) the growth rate in company earnings (which are closely related to overall economic growth). Mature Western Economies with stable or even declining populations will be lucky to produce real growth of 2% per annum. Add to this the paltry dividend yield and you are far short of the 8% return goal.
Bonds are not much help either with nominal yields hovering around all-time lows of roughly 4% on average.
Attempts to achieve better returns in alternative assets - especially Hedge Funds - may be offer some help for those funds skilled (or lucky?) enough to pick the winning funds but will offer no solution to this basic lack of returns that the industry as a whole faces. The only sustainable solution is to offer lower future pensions, raise contribution levels or a combination of both. Attempts to squeeze the costs of pension fund management and administration may also be helpful in a marginal way.

A Takeover Panel for Bond Markets?

Shareholders - at least in the United Kingdom - have for a long time benefited from a clear set of rules enshrined in a Code of Practice.
The recent trend to Mega-Bids by large Buy-Out Funds that even start to combine in consortia has created a situation where most sizeable companies that have bond issues outstanding can become targets of bids.
As most Buyouts are also expected to use a substantial amount of debt capital the outstanding bond issues can be subject to downgrading by the markets and rating agencies.
The regulators and should without delay look into this problem. Including the Holders of Debt in any Takeover Code would be a just solution and support confident in the functioning of the Public Bond Markets.

Bollore gets four seats on Havas Board

As there are now 18 seats on the Board - a number which is probably too large - it only looks reasonable if the largest shareholder (20%) gets a proportionate number of representatives on the board. But does that mean that other large shareholders should be able to demand the same treatment? Large institutions are often holders of 5-10% stakes in the companies that feature on their buy-lists. This would certainly endanger the concept of the unified board that should act in the interests of the company as a whole.

Conflicts of Interest in MBO's

A recent survey found that 78 % agreed that company managements have lost sight of their obligations to their shareholders.
We think it is incompatible with the obligations of a Chief Executive of a Listed Company to be involved with parties that are attempting to buy the business he is running in a fiduciary capacity for the benefit of the shareholders. While not directly comparable to Insider Trading, this practice - widely accepted today - does not pass the smell test.
Only after a proper cooling off period of between one and two years should a Senior Management Member be allowed to be part of any scheme to bid for his previous employer.