Government considers changes to fund manager pay

After 16 months the government has revealed how it plans to act on recommendations made by Professor John Kay to shift fund managers from short-term to long-term performance-based pay.

The government stated it would like to see appropriate levels of transparency from asset managers so that their clients would know pay packages were aligned to their investment objectives.

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In this context, the government applauded the National Association of Pension Funds’ attempts to get asset managers to self certify, indicating to pension funds and other clients the extent to which they fulfil a number of different categories of good practice in stewardship.

The Napf framework invites asset managers to indicate the extent to which manager remuneration is linked to long-term portfolio performance.

The government welcomed the initiative as “a good example of the investment community developing good practice tools to change behaviour”.

It stated: “The government would like to see investors move away from the default use of short-term (including quarterly) relative performance metrics, towards metrics which focus on achieving returns in line with the long-term objectives of the end investor.”

In his report, Professor Kay recognised the incentives driving the actions of fund managers are one of the most important factors within the investment chain.

He urged a cultural shift away from short-term to long-term performance-based pay.

The government’s response also revealed it has also commissioned research, to be completed by April 2014, into the uses and limitations of metrics and models used in the investment chain, from the perspective of long-term investors.

Adrian Bailey MP, chairman of the Business, Innovation and Skills Committee, said: “I am pleased that the government recognises the need to play an active role in implementing the recommendations of the Kay Review, and note that it has not ruled out legislative and regulatory measures to bring about change.

“In a number of areas, however, the government appears to reject our recommendations on how it can drive reform. Warm words must be backed up by action if progress is not forthcoming.

“The 12 years of inaction following the Myners Review is proof enough that cultural change will not happen without a catalyst. The government must be willing to provide that catalyst and pick up a regulatory stick if necessary.

“The committee will watch this area closely and will want to see evidence of significant progress by the time the government’s progress report is published in 2014.”