Government proposals to require 50 per cent of pension fund trustees to be member rather than employer nominated are set to cause chaos, it was claimed yesterday.
The issue, coupled with changes to pension regulations that make it increasingly difficult for company directors to manage conflicts of interest, could lead to a brain drain of valuable investment expertise from trustee boards, according to Aon Consulting, the pensions, benefits and HR consulting firm.
It predicts that if the legislation comes into force, it could cost pension schemes more than £7.5 billion per annum in lost investment opportunities.
According to industry estimates, the total assets invested in UK pension schemes is around £ 750 billion.
Aon said member-nominated trustees brought a valuable perspective to trustee boards, but usually did not have a financial background and so found it difficult to gain a thorough understanding of all the investment aspects of the pension scheme within the time that they had available.
This issue, it warned, would become more pronounced unless the proposed legislation was revised.
And it would impact on a key aim of the Myners Review, which was that "decisions should be taken only by persons or organisations with the skills, information and resources necessary to take them effectively".
Aon said the problem was made worse by the attitude of the new Pensions Regulator, who was expecting trustees to behave towards the sponsoring company in the same way as a lending bank - forming an independent view on the credit worthiness of the company and negotiating aggressively on contributions. This put a company director who was also a trustee in a very difficult position.
Marek Siwicki, senior investment consultant at Aon Consulting, said: "In my experience member-nominated trustees do look to those with greater financial expertise on the trustee board - usually senior company directors, and often the finance director. As the Pensions Regulator is forcing senior company people off the trustee board, the level of financial understanding of boards is going down.
"This will lead to many trustee boards following the more established investment strategies, with which they can claim familiarity, but which will not necessarily provide the optimal level of investment returns."
Julian Fox, senior consultant at Aon in Birmingham, commented: "Conflicts of interest are a big talking point with local directors and I have already heard of a number of cases in the Midlands where directors have removed themselves from trustee boards to avoid future conflicts."