The total investment work currently undertaken by the PTO has not been tackled as a strategic and coherent programme embracing its £4 bn total funds under management: instead, existing patterns within different areas of responsibility have been perpetuated. This has meant that one fund manager has a responsibility for Common Investment Funds (from Court Funds Office, Protection and Receivership sources); PTO staff themselves do the investment work for Trust and Receivership cases and two brokers handle the bulk of capital funds of Protection cases (16% of these cases retain their private brokers). Minors' funds and Protection and Receivership patients' funds can be placed in a Special Account managed for the PTO by the National Investment and Loans Office of HM Treasury. The rate of interest in this account is prescribed by a direction made by the Lord Chancellor with the concurrence of the Treasury; between 1993 and July 1999 it paid a gross interest rate of 8% but on 1 August 1999 this rate reduced to 7%. There is no social or commercial justification for such funds being subject to short-term interest rates that are either significantly lower or higher than could be obtained by informed but prudent investment in the open commercial market, although the fact that the charges levied by the National Investment and Loans Office are very competitive is an important factor.
There has been criticism by the Comptroller and Auditor General and the Public Accounts Committee, which unfortunately cannot be refuted from the PTO's records, that the Agency's investment performance and its control over the brokers acting as its agents has failed to optimise the clients' funds it manages. Judging from the submissions this Review has received from individuals and organisations acting on their behalf, this is also a widely held view amongst the PTO's stakeholders. Virtually everyone this Review consulted outside the PTO would like to see far greater involvement by the private financial sector in its investment responsibilities: they also wanted to see the same standards of accessibility, information provision and accountability provided for PTO clients as are now commonplace for clients of private financial services.
A lack of responsiveness, accessibility and transparency all combine to cast doubt on the effectiveness of the PTO in this key area of its responsibility - something that is particularly demotivating to staff in its Investment Division (who are frequently singled out for being personally knowledgeable, understanding and helpful), trying to give a good service but hampered by a lack of appropriate IT, an overall investment strategy and best practice contract management knowledge.
The Lord Chancellor's Honorary Investment Advisory Committee (HIAC) is an independent body made up of seven financial experts from the private sector appointed by the Lord Chancellor. Members of the committee are selected in a variety of ways, but principally from the Public Appointments Unit and provide their services free of charge. The Committee normally meets five times a year to review the general financial markets and the performance of investments, to give advice and make recommendations
There is an element of confusion around HIAC's field of responsibility. The fact is (as HIAC members are all perfectly clear), it has no direct role in specific investment decisions or tactics; but there is a belief and impression amongst PTO staff that HIAC does in fact exercise some sort of executive role and gives quite specific guidance as to the types and areas of investment to be selected.
HIAC's way of working and the use made of the great collective expertise it possesses have not been thoroughly reviewed for at least 20 years. Its members - some appointed in the last year, the rest with many years experience - are unanimous in believing they could do more to help the PTO with its investment responsibilities, even with the confines of their current role. All see the scope for involving the private financial sector to a much greater extent and to better effect.
Two points stand out from the foregoing. First, if the total funds under PTO control (including at least the bulk of the Court Funds Office's assets currently administered by the National Investment and Loans Office) were aggregated for investment purposes, they would offer significant leverage to PTO management to receive top quality professional investment services for their clients at the lowest possible management fees. Second, that the PTO's long experience of the investment needs of an unusual client base should be augmented by leading edge skills from the private financial sector, including getting high-performing companies to take full responsibility for the investment of funds, under standard contractual arrangements.
It is recommended that, as an initial step, PTO and LCD HQ test the market and select on a contract basis some appropriately skilled and experienced strategic investment support: there are a few major firms who fit this particular criteria. An analysis of PTO's funds and their scope for investment management by the private financial sector can then be carried out. Subsequently, it is recommended that all funds currently under PTO control are rolled up and regarded as analogous to a pension fund consisting of different categories of clients with varying needs for growth, income and risk exposure. A spread of specialist funds would cater for these categories, but direct responsibility for virtually all investments should be placed in the private financial sector, subject of course to proper monitoring.
It is recommended that the management of this aggregated fund should lie not solely with the executive directors of the PTO, but additionally with one or two appropriately - experienced non executive Directors, professional investment support and a small number of qualified Trustees. Precise roles and line of accountability must be clearly devised, but the standard arrangements for Pension Fund Boards with, for example an Investment Committee and an Audit Committee would be a good start. In return for direct contribution to this major and sensitive piece of fund management, appropriate remuneration for the non- executive Directors and Trustees concerned would be essential. It is recommended that this arrangement replaces HIAC whose current role - very much on the lines devised for it over eighty years ago - is not appropriate as the only source of external support for such funds of this magnitude in today's financial and public service climate.
Once clear objectives for the aggregated fund and the likely makeup of the specialist funds into which it would be divided had been fixed, it is recommended that specialist fund managers be selected after open competition. It is also recommended that contractual arrangements and their monitoring together with the necessary benchmarking be devised, again using a combination of PTO specialist business knowledge, leading edge best practice in the private sector and comparable public sector experience. Fund managers' performance would be judged against recognised and recognisable industry standards rather than the bespoke KPIs the PTO has used hitherto. They would be required to report regularly to the Investment Committee and the Board. The objective must be transparency for all those seeking reassurance about private individuals' money placed under public sector control at the direction of a Court. Such funds must be, and seen to be, invested and protected to standards which are regarded as high in the private sector, where clients can exercise immediate choice. To the extent that the National Investment and Loans Office might still be responsible (at least for a time) for some of the Court Funds Office's investments, its performance should also be reviewed by the Board.
As well as high-quality investment performance, Trust clients and Court of Protection patients must receive a standard of customer service on their investments that is clearly comparable to any private client with funds under professional management. Specifically, they must be able to exercise an appropriate degree of control over investment strategy if they are able and willing to do so; statements (typically provided annually) must be in a clear and understandable format and requests for action eg the release of funds, must be dealt with at the same speed as that experienced by a private client in any comparable branch of the financial service sector. Whenever contracts are arranged with appropriate fund mangers, it will be crucial to ensure that they can guarantee reasonable access for any receivers who want to discuss an individual portfolio even though, reflecting present day standards in the private sector, this is most likely to be by telephone or e-mail. Personal interviews would be possible on occasion, but the cost involved would need to be reflected in the patient's own accounts. Again, this is nothing unusual and merely puts receivers appointed by the Court of Protection on the same footing as any private investor.
More than one contributor to this Review pointed out that the PTO is not subject to the Financial Services Act whereas any appointed fund manager or broker certainly would be. Demonstrably high-quality aggregate fund management at low cost should be the investment arrangement of choice for the great majority of private receivers (and certainly for all professionals appointed to Receivership work). They should be reassured by the level of returns, client service and management fees, all clearly reported to them on a regular basis. But it is recommended that the PTO and the Court of Protection agree criteria and procedures to give alternative investment authority to those receivers who can demonstrate that their preferred private investment arrangements are appropriately robust and properly devised. In yet another example of the need for finely balanced judgement, such private receivers should expect to be thoroughly examined to ensure their proposals protected the patient's assets while not being made to feel that their satisfactory private investment plans were being officiously overridden.
Currently 16% of Protection patients have their assets invested under private arrangements. If the PTO supply all receivers with an annual headline summary of its fund managers' performance and costs such receivers can make an informed choice as to whether their own arrangements remain a better option. It is recommended that PTO caseworkers refer back to the Court any instance where their annual review of accounts identifies a markedly poor performance by private investment plans.
Another essential component of the PTO's contracts with fund mangers is that they must provide the PTO staff who are monitoring their performance and providing them with specialist knowledge of the client base with access to their own IT systems to allow this to be done meaningfully. This is a well-established arrangement in the private sector and it has the added benefit of removing from the PTO the need to upgrade its own antiquated IT systems in Investment Division.
There is one element of Investment Division's work that this Review found particularly interesting. It flows from the fact that the Public Trustee acts as Trustee for a number of pension funds and friendly societies. A dedicated part of Investment Division manages £400-500 million of the investment for 19 funds known as ZF Funds. These funds currently perform well, comply with all legislative and financial regulatory requirements, produce annual accounts, financial statements and have proper controls in place that enable them to produce quarterly reports for clients in a format that is comparable to any other fund manager.
This part of Investment Division has developed its own IT systems and produces its own user requirements, updating the systems when necessary. It has used accruals accounting for a number of years and liaises closely with the National Audit Office, keeping ahead of changes to accounting practices. In effect it is a rich source of best practice for investment performance and financial information inside the PTO; but it has operated in isolation and has not been utilised to good effect. It is recommended that the Director for Change ensures that the experience and standards of ZF Funds are appropriately integrated into the PTO's financial planning, client service and monitoring work.