Pension funds: Sleeping partner or good steward

March 27, 2014 12:23 pm

Pension funds: Sleeping partner or good steward

By Sophia Grene

Should pension funds act as sleeping partners, whose role is no more than the price-setting of market participants, or do they have a more active part to play in the companies they own, acting as good stewards of their assets?

The British public is pretty clear: they want their pension schemes to engage, particularly on significant topics such as pay and taxes, according to research from the UK Social Investment Forum, the responsible finance association.

Research carried out for “Ownership Day” on March 25, an initiative dedicated to raising awareness of the use of shareholder rights to improve the long-term value of a company, found 53 per cent of those surveyed want pension funds to engage with companies to try and make sure they pay their fair share of tax.

Remuneration issues are also high on the priority list, either in the form of encouraging companies to pay a living wage, or clamping down on excessive executive pay and bonuses.

“If we are to rebuild public trust in savings, then we need all major funds in the UK to act as responsible stewards, not absentee landlords,” says Simon Howard, chief executive of UKSIF.

“They need to use the information and advice available to them to set the tone for how their funds are managed, and our research shows this is what the public – the people the funds are run for – want.”

“There is a great deal of feeling out there that they [pension scheme members] own the means of production,” says Paul Uppal MP, the Conservative member of parliament involved in promoting Ownership Day. “The appetite for engagement is very strong.”

Thirty-nine per cent of the 2,683 adults polled in the online survey think that environmental, social and governance issues can affect the long-term value of investments, while 48 per cent believe institutional investors have stewardship responsibilities.

Pension fund trustees are even more enthusiastic about engaging companies on these issues.

“Large pension funds have increasingly understood that environmental, social and governance factors are material factors, and engagement can at least offer some downside protection,” says Will Pomroy, corporate governance policy adviser at the National Association of Pension Funds. A recent NAPF survey found 96 per cent of pension funds believe institutional investors have a responsibility to exercise good stewardship of their assets. This includes engaging with companies and voting at annual general meetings. Eighty-two per cent believe ESG issues can affect long-term returns.

What is less clear is how easy it is for pension fund trustees to do this, given the structural obstacles.

“There are a few links in the chain between asset owners and the companies they own,” says Mr Pomroy. These links usually consist of investment consultants and one or more layer of fund managers. Mr Pomroy says pension funds are interested in the concept of stewardship, but need some support in implementing it.

But these good intentions are damped by lacklustre support from investment consultants, who are increasingly unlikely to raise the issue with their clients. Just a quarter of pension funds surveyed said consultants had raised it, down from 38 per cent a year previously.

Even fewer respondents (23 per cent) were happy with the processes their consultants had in place to review investment managers’ engagement activities.

Investment consultants, however, say their pension fund clients are reluctant to implement stewardship procedures.

“We do proactively raise the issue with clients,” says Aled Jones, head of responsible investment at Mercer, the consultancy. “There is a range of appetite across our client base.” Mercer offers a stewardship service, which involves working with the client “to help them understand what stewardship means” and then assessing equity managers and suggesting ways the asset owner can ask the manager to improve their processes.

“It is still a minority of clients who take up this service,” says Mr Jones, although he does say the proportion is growing, if slowly.

Helen Roberts, investment specialist at the NAPF, provides suggestions for how pension funds can make stewardship an integral part of their investment process.

“From the RFP [request for proposal] stage, pension funds should be asking managers about engagement and making sure
the whole thing is joined up.”

If investment consultants are not offering enough support, she says, pension funds should “jump that layer and engage more directly with fund managers themselves”.

Traditionally investors have used the threat of disinvestment to persuade companies to listen to them, but passive funds do not have that option. But increasing allocations to passive funds is no bar to improving engagement, says Mr Pomroy.

“Some passive managers have large, active engagement teams and are very passionate about it,” he says.

 

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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