Thursday, 31 January 2008

Bank/building society advertising

Three ongoing advertising campaigns for well-known financial service providers - NatWest, First Direct and Nationwide - seem to be basing their pitch to punters on the basis that their industry is full of shysters.

NatWest ads for a number of years have featured banks being rubbish at looking after their customers. From the 'my bank is now a trendy wine bar' ones a few years back to the 'yeah Will' series currently on TV they have portrayed banks treating the public like suckers. The FirstDirect ads currently showing feature a double act of a sales dude in a white suit and a cynical (potential?) customer in a black suit who doubts the motivations behind the promotions being offered. And the Nationwide ads are probably most extreme as they feature a bank manager who is fat, lazy and is open about how they take existing customers for granted, and clearly doesn't mind annoying customers to the point they leave.

I can understand this on one level. The public has a pretty low opinion of the financial services industry, so the pitch is basically "you're right to think that their are con artists in our industry, but we are different". But I'm not sure that playing up the bad reputation of the industry is a smart way to flog more services.

One of the reasons the banks built big impressive buildings in the past was to convey to the punters that they were solid, solvent and trustworthy. But with a lot of financial services advertising now playing on the idea that financial services companies treat their customers badly, isn't this just going to reinforce the idea that its an industry based on ripping off the punters? This will no doubt lessen the confidence of those who are already worried about financial matters. Even worse if might mean people almost expect it when they genuinely are ripped off by their provider.

Rambling about writing and thinking

As I have mentioned before, I'm quite a fan of the narrative paradigm - the idea that we are principally story-telling animals and that most of our communication takes the story-telling form. We are faced by a complex world which we struggle to make sense of, so it is is easier to understand it in terms different narratives, each with plots and characters in them.

One of the reasons I find this a compelling way of looking at the way we understand reality is the number of times you find personality-based (or dispositional to use the lingo) explanations of events cropping up in political 'analysis', or the way people try and personify political opinions they disagree with. The fact that we often rely on dispositional explanations for events is surprising. Unless we were able to run the same event over and over again and witness the decisions made by people of differing personality types it's difficult to see why we should have confidence that the character of the individual is the swing factor. Yet such explanations crop up all the time. As an example here's a line from the Telegraph business section last year about Mervyn King's role in the Northern Rock crisis:

"More than ever it looks like King has been reading from the wrong page of the regulatory manual, betraying his background as a clever academic when the situation required the gut feel of a banker."


Much journalistic writing, even that which is offered up as analysis, strikes me as very obviously falling into the story-telling category. This is probably not surprising given that many journalists are not experts in the fields they cover. Hence what they write tends to rely on narrative explanations rather than a genuine understanding both of what is happening and why it is happening. Personalities play a big role, as do simple cause and effect interpretations. A good example from the financial world is the impact of the abolition of dividend tax credits on pension funds. It clearly did not help as it reduced the investment income available, but I think it's simply wrong to suggest it is the 'cause' of the closure of final salary schemes. Yet it is frequently referred to as the 'cause' because it's an easy way to explain what happened and means that we can put blame on a decision made by an individual. The alternative is to see the closures as the result of an unhelpful combination of a number of factors. But that's a complicated explanation and not much fun.

Don't underestimate our attachment to our narratives. The first Pensions Commission report covered the closure of final salary schemes and basically made the point that getting rid of tax credits wasn't the cause (they identified various factors - mortality, the post-2000 bear market, increasing regulation guaranteeing benefits that were previously discretionary etc). I noticed at the time that when faced with this challenge to their narrative at least one well-known financial journo interpreted this as being the result of Adair Turner trying to avoid saying anything politically embarrassing. Whilst I'm not naive enough to think such things don't happen, why overlook the possibility that the report was telling the truth? Maybe because the dispositional get-out means that the journo can continue to use their narrative short-cut understanding of the issue, rather than considering the evidence and perhaps revising their opinion.

I think the desire for narratives also manifests itself when people radically change their political views. It's notable that when some people's politics change they often seem to go through a wholesale change. We can all think of examples of those formerly some way out on the Left who subsequently became thoroughly right-wing. That is of course absolutely their right, but it is surprising that a number of such people seem to shift their view from Left to Right on each and every issue. It's unlikely that any 'side' is the sole repositery for truth, therefore wouldn't we expect to see more people become unaligned (as they realise that the side they had affiliated with is 'wrong' on certain issues) or simply moderate their views, rather than shift from one pole to another? If people are rationally considering each and every issue we might well expect to find this happen, but if we are principally in the business of buying narratives then maybe it's not surprising to see people chuck out one and replace it with a diffrent one. It's a lot easier than thinking through each issue in detail.

I'm not claiming any superiority here - I am as bad as anyone. I used to go on a mainstream news messageboard quite a bit to talk (mainly) politics with people. But I grew frustrated at the nature of the discussions that took place. It was almost as if there was a sort of choreography at work. If Right-Wing Person A makes Point 1, then the 'correct' response from Left-Wing Person B is Counterpoint 2. There is clearly an element of pattern recognition going on when you are involved in this type of 'discussion'. Of course George Orwell got there first. This is from Politics And The English Language:

"A speaker who uses that kind of phraseology has gone some distance towards turning himself into a machine. The appropriate noises are coming out of his larynx, but his brain is not involved as it would be if he were choosing his words for himself. If the speech he is making is one that he is accustomed to make over and over again, he may be almost unconscious of what he is saying, as one is when one utters the responses in church."


On the messageboard I was no better than anyone else at avoiding this, but after a while I could at least recognise that I was feeling pulled towards writing certain responses without really thinking about the content of the proposition I was about to challenge or that of my response. As a result I increasingly found myself not responding to things unless I felt a) I knew what I was talking about and b) I was actually going to add something to the discussion.

In real life I still find it a problem. When I am trying to understand what is going in the financial world I often feel the pull to adopt a mini conspiracy theory about why a particular organisation has done something (or not done something) rather than looking at the evidence. One plus point in all this is that I actually feel a lot better when I have put the effort in to understand an issue properly. Despite the strong desire we feel to adopt a certain narrative, I think that once you make yourself aware of the process, and how it can lead you to a wonky understanding of an issue, you can act to correct it. I think I am slowly training myself to be uneasy when I feel that my understanding of an issue is narrative-driven.

Of course you can only take this so far. Conversation and writing would get pretty slow and boring if it was reduced to a collection of evidence-based propositions and their refutation. But I have this recurring thought that unless you do keep plugging away to try and get some sort of handle on the 'truth' of an issue then we simply end up with our heads full of narratives that add very little of value to our understanding the world.

Wednesday, 30 January 2008

TUAC response to WEF private equity report

Not surprising to see the unions pick up on the WEF report I posted about previously. It does blow a hole in the claims made by the private equity industry about job creation. Excerpt from the TUAC release below, full version here.

A key finding of the report – one that was most widely reported in the media – concerns the quantitative employment impact of private equity. It shows that private equity transactions are typically preceded and followed by an abnormal depression in employment levels and that the latter only catch up with non-private equity levels after 4 to 5 years. Job destruction appears particularly severe in the services sector, where “the cumulative five-year impact is 9.7% lower employment” in private equity-owned companies than comparable non-private equity averages. The WEF study contradicts the enthusiastic private equity industry–backed “surveys” that are regularly posted on the web to show how private equity creates jobs.

RyanAir's cowboy advertising

Anti-union airline RyanAir is in trouble with the Advertising Standards Authority (ASA) yet again. This time the ASA has told it to withdraw an advert promoting "hottest back to school fares" with a picture of a model dressed up as a schoolgirl.

The follows the ASA pulling RyanAir up for misleading claims about lastminute.com , bogus claims about Eurostar and talking bollox about carbon emissions made by the aviation industry.

They are clearly a serial offender when it comes down to misleading and inappropriate advertising. It would be interesting to see what, if anything, institutional shareholders think about it.

Tuesday, 29 January 2008

UNI report on sovereign wealth funds

I have a copy of UNI's report on Sovereign Wealth Funds. Unfortunately I only have it as a PDF and I can't see it on the UNI website to link to. If anyone would like a copy add a comment to this post and I can email the PDF to you.

Barack Obama & behavioural economics

How did I miss this article. First time I have seen anyone refer to behavioural economics as left-leaning too. I think this is (wrongly) inferred from the way that it challenges the idea that people necessarily make economically rational/optimal decisions, which many right-leaning people seem to find troublesome.

Senator Obama’s ideas, on the other hand, draw heavily on behavioral economics, a left-leaning academic movement that has challenged traditional neoclassical economics over the last few decades. Behavioral economists consider an abiding faith in rationality to be wishful thinking. To Mr. Obama, a simpler program — one less likely to confuse people — is often a smarter program.

.....

Mr. Obama would instead require companies to deduct money automatically from their employees’ paychecks and place it in a savings account the employee owned. Employees could opt out of the program. But if they did nothing, they would end up saving money. It’s an idea that comes directly from academic research showing that savings rates have jumped when individual companies have adopted such plans.

Treasury select committee report on Northern Rock


This is seriously worth a read. If you want to cut through a lot of the guff that has been talked about Northern Rock this is a really good way to do it. Downlaod the report here. It pulls together written and oral evidence from all the key players (the management, Bank of England, FSA, market participants) and does a good job of describing what happened, when and (to some extent) why. There are loads of interesting insights from a variety of sources, many of which are enlightening (to me anyway).

The FSA gets an absolute pounding, and is accused of systematic failures. The BoE gets off more lightly, though it is clear that the committee is sceptical of the Governor's initial stance of making the avoidance of moral hazard a top priority. There is also a very interesting bit where the Governor challenges the idea that he should have been quicker to provide liquidity, especially given the action of other central banks.

"One of the points most people fail to understand … is that the European Central Bank has not increased the amount of liquidity at all since the beginning of August. It has redirected some of the liquidity that it would have done at one-week term to three-month term, but the total amount of liquidity that it extends to the banking system is absolutely the same now as it was in June and July before the turmoil began in August. That is not readily understood by many people. The amount of liquidity that we are extending to the banking system is almost 30% higher. I do not put enormous weight on that. I think what we have is a system, which I prefer, in which the banks can choose their own reserves targets. If they say they would like to hold more reserves with the Bank of England we readily supply it on demand. That is why we are supplying 30% more now than we were. Equally, the Federal Reserve has not raised the total amount of liquidity very much. There is a certain myth in all this that goes around and we take our share of the responsibility for not explaining it properly, but it is not easy to get across these points."


Equally the appears to committee accept that a further injection of liquidity by the BoE was unlikely to have been able to save Northern Rock, nor would it have necessarily been good for the market:

"We cannot know whether an open market liquidity operation of the kind asked for by a number of banks in August would have prevented Northern Rock’s need for emergency support from the Bank of England in September. It is most unlikely that any such lending operation in September, following the stigmatisation of Barclays which we deal with later, could have been of a sufficient scale to ensure that Northern Rock could have received the liquidity it then required. Such an operation would also have raised severe ‘moral hazard’ concerns, signalling to the banking sector as a whole that public sector support would be made available in the event of any bank facing distress."


Finally and most importantly the report is clear that the primary responsibility for the crisis that hit Northern Rock lies with the company's management. That this needs restating says a great deal about how these issues are presented by both the financial sector and repeated by some business journos.

Why the board got it wrong is probably worthy of a report by itself. Although the business strategy was clearly risky, they could have covered themselves by, for instance, taking out more insurance which would have given them access to long-term loans (something actual sub-prime lenders like Countrywide did). As I have posted before, they also believed that credits markets freezing simultaneously was 'unforseeable', but that's perhaps why they ought to have planned for such a Black Swan. At the end of the day it was their responsibility.

Here's what the report says:

"The high-risk, reckless business strategy of Northern Rock, with its reliance on short- and medium-term wholesale funding and an absence of sufficient insurance and a failure to arrange standby facility or cover that risk, meant that it was unable to cope with the liquidity pressures placed upon it by the freezing of international capital markets in August 2007. Given that the formulation of that strategy was a fundamental role of the Board of Northern Rock, overseen by some directors who had been there since its demutualisation, the failure of that strategy must also be attributed to the Board."

Monday, 28 January 2008

New issue of Capital Matters

A quick plug for the latest newsletter from the Pensions and Capital Stewardship Project of the Labor and Worklife Program at Harvard Law School. You can download the newsletter and subscribe to it here.

Stockmarkets & the super-rich

Just a quickie. Recently the Institute of Fiscal Studies put out an analysis of the super-rich. The most interesting bit to me was the suggestion that the rate at which the gap between the super-rich and the rest of us grows is dependent on what the stockmarket does. Coincidentally The Observer had a piece in it yesterday about how recent market falls would hit typical FTSE100 execs by up to £250,000. There's a clear message here - the more of your assets that are linked to equities the bigger impact this can have on your wealth. One to remember for DC schemes!

Separately the TUC has published research, also in yesterday's Observer, suggesting that the super-rich are saving £12bn a year through tax avoidance.

Sunday, 27 January 2008

War On Greed

A quick plug for the War On Greed website. This US campaign is making the case for the closure of tax loopholes that enable private equity leaders to pay less tax than working people. Includes some video interviews with workers at US plants that have been adversely affected by a buyout by KKR, the outfit that bought Boots last year.

Private equity not good for jobs says WEF

The World Economic Forum has just published a paper about the global impact of private equity. You can get hold of the exec summary if you scroll down to the bottom of the press release. I'll just pull out the section on employment from the summary. It clearly does not back up the claims frequently made by the industry that it has a better job creation record than businesses not owned by PE.

• Employment grows more slowly at target establishments than at the control group in the year of the private equity transaction and in the two preceding years. The average cumulative employment difference in the two years before the transaction is about 4% in favour of controls.

Employment declines more rapidly in target establishments than in control establishments in the wake of private equity transactions. The average cumulative two-year employment difference is 7% in favour of controls. Just as was the case before the private equity transaction, growth at controls is higher in the three years after the private equity transaction. In the fourth and fifth years after the transaction, employment at private equitybacked firms mirrors that of the control group.

Post-transaction, buyout establishments seem to create roughly as many jobs as peer group establishments. Gross job creation (i.e. new employment positions) in the wake of private equity transactions is similar in target establishments and controls. The difference in net employment is attributable to higher gross job destruction rates in targets.

• Firms backed by private equity have 6% more greenfield job creation than the peer group. Greenfield job creation in the first two years post-transaction is 15% of employment for target firms and 9% for control firms. It appears that the job losses at target establishments in the wake of private equity transactions are partly offset by substantially larger job gains in the form of greenfield job creation by target firms.



Separately there is a broadly positive message from the WEF about sovereign wealth funds. These are big state-run investment funds that are becoming increasingly important shareholders in some markets. I won't repeat the sont of the WEF press release, save to say that there is an argument that SWFs are actually moe long-term investors than other market participants. In addition they certainly need to be more transparent.

Saturday, 26 January 2008

When choice ATTACKS!

There's an interesting post over on Dave's Part about choice. This is a really interesting area and it's a shame that we lefties get ourselves in a muddle over it. I don't think we should ever find ourselves in a position where we are arguing against choice full stop, but that doesn't stop us from criticising the extension of choice where it doesn't help, or is even counter-productive. As Dave's post makes clear, not all choices are the same, or as important/valuable (to the punter) as each other.

In the bit of the world I inhabit, pensions, the Government has effectively accepted that choice does not work effectively. The decision to set up Personal Accounts on an opt-out basis reflects the belief that in choosing whether or how much to save, people frequently make sub-optimal decisions. They don't save even when their employer will make a significant contribution. The Government has therefore decided on a system where a choice will be made for you unless you actively make another. This is very similar to the approach being advocated for organ donations and Stumbling And Mumbling has a good run-through of the arguments around sub-optimal decisions here.

And here's the first important point about choice. If you ask people if they want a choice, they will tend to say yes. But if you you ask people to make a choice they will often put it off, or stick with their existing choice (ie not exercise their freedom to make another choice). There is a clear divide between our idea of choice at the theoretical level, and what we actually do in practice.

As an example of this there was an experiment done where one group of people were asked to plan their lunch choices for a few weeks in advance (ie they couldn't choose on the day). A seperate group were allowed to choose what they would eat each day. The first group chose a wider variation of dishes than the group who could decide on the day, who often tended to go for the same thing even though they were 'choosing' anew each day. You could read this in various ways. Maybe the first group overemphasised their desire for variation. Alternatively maybe the latter group were using their existing choice (the day before) as a shortcut for deciding. If it's the latter then maybe choice can be a burden.

In fact as I have posted before there is quite a bit of evidence that the extension of choice can lead to less actual choices being made. In the examples I have linked to this is shown in respect of investment fund choices in DC schemes. However it occurs elsewhere. In Barry Schwartz's book The Paradox of Choice a similar example is given of choices of jam in a supermarket. With too many options the retailer can actually end up selling less jam overall.

The fact that different choices affect us differently is also a reason to treat choice carefully. As Jospeh Stiglitz has pointed out, 'learning' a suitable choice might be relatively painless when it comes to deciding what foods you like, but getting it wrong in terms of your retirement provision can do you a lot of damage and you can only really discover the impact of your error when you retire. I would add that there is also no pressing need to address the choice in the latter case. If I am hungry I go into the supermarket and buy something to eat. I might discover I don't like it, so I won't buy it again, but I will need to eat again soon and at that point I can make a 'better' choice. But with retirement saving there is no short-term need for me to address the issue, or to correct my choice. Which is exactly why procrastination and inertia are a significant problem.

Ultimately the decisions on Personal Accounts and, potentially, on organ donors, demonstrate that the Government recognises the problem with choice. Such opt-out approaches seem to be most often described as either 'managed choice' or 'libertarian paternalism', the latter seemingly aimed at soothing right-wingers who are unsettled by the idea that choice can be a bad thing. I also think that these developments open up opportunities for the Left to show it can be relevant in the choice debate. If we can demonstrate an understanding of how choice really works, and therefore where it might not be a good idea, it could be the Right that ends up painted into a corner. However that means discussing choice properly, rather than bristling at the idea that it might sometimes be the right option.

Thursday, 24 January 2008

Hain out, Purnell in

Shame to see Peter Hain forced out, but on the plus side James Purnell coming in as Work & Pensions Secretary does at least bring a bit of experience to the top of the DWP. He is of course the former pensions minister. He is also a bad photographer as John and I learnt last year.

"Public sector to be forced to switch to DC"

God I hate it when companies that make money from pension funds argue in favour of attacking people's pension benefits. Have a look at this story on Professional Pensions.

"My personal view is the current DB structure cannot be sustained in the long term. If the private sector is going DC the public sector will have to follow. The financial imperatives are there. If it does not happen there will be an increased divide between ‘them and us’."

Notably the idea of closing the MPs' pension scheme and setting up a DC scheme is also given support. Funnily enough the line of argument in favour is sort of the mirror image of the one I used against:

"I think that would be a great thing. It would improve understanding of what a DC pension is. There is nothing like being in one to help you understand what the issues are."

Wednesday, 23 January 2008

Traffic counter 2

I've mentioned before how useful my traffic counter can be. It's come up trumps again today. Check out this record from 3.46pm today.

Domain Name chugai-pharm.co.uk ? (U.K.)
IP Address 194.203.158.# (Conservative Central Office)

The referring URL by the way was this story on LabourHome.

Panic on the streets of London...


It's looking grim out there in the markets today again, with the FTSE, Dax and CAC40 all registering significant falls at the time of writing. The most common interpretations for the panic are a) market fear that that European central banks won't match the US Federal Reserve's whopping 0.75% cut and/or b) that the Fed's cut in itself is cause for chickens to lose their heads.

I'm not going to cover this in any detail, especially as it is being done much better than I ever could elsewhere on t'internet, save to say that much as I am sceptical about what stockmarket movements actually tell us today I find myself agreeing with... Jeff Randall... that what is happening currently does matter. Having been a trustee of pension fund during the period that markets went on a prolonged southwards walk I do think these falls wil probably do some damage, as it would take a serious outbreak of optimism to turn them around quickly. And optimism is currently in short supply.

I can understand the NAPF's desire to not frighten the horses by saying this is all short-term froth and that it won't matter that much in the long-run, but then look what is happening to BT because of its pension fund's exposure to equities according to this piece. The decline in BT pension fund's equity holdings is worsening the funding position, leading to the value of BT shares to drop. Apply this to other pension funds of listed companies with large equity holdings and you see the problem. Ooerr...

Tuesday, 22 January 2008

Still following the money - update

A quick update on how fund managers voted on Caledonia Investments giving £60K to the Tories at the investment trust's AGM back in July.

Now I've found that Newton also voted AGAINST, see the bottom of the first column on page 4 of this report. Their explanation for the decision is worth repeating:

"Newton felt that the company's shareholders should not be funding such a cause and that it should a matter for individuals to decide on the personal level of support that they want to provide to political parties."

Exactly. If individual directors of Caledonia - or Fidelity - want to give the Tories their hard-earned then that is up to them. But they should not use the company's money to provide partisan financial support.


The updated list of voting decisions so far -

Baillie Gifford - AGAINST
Co-operative Insurance - AGAINST
F&C - AGAINST
Insight Investment - FOR
M&G - ABSTAIN
Newton - AGAINST

Mike O'Brien on Tory plan for MPs' pensions

I missed this last week. Good to see that pensions minister Mike O'Brien is alert to what the Tories are up to. This is from Pensions Week:

"This would send a signal to the employers hundreds of thousands of workers who remain in final salary schemes that the Conservatives don't care about them and are prepared to reduce their income. This should serve as a warning: if you're in a final salary scheme, don't ever vote Tory or they would destroy it."


My views on the plan to shut the MPs' scheme are here.

Sudan/Burma divestment snippet

John Gray has pointed out that giant Dutch public sector pension scheme PGGM has sold its holdings in PetroChina due to concerns about the activity of its parent CNPC in Sudan. One bit worth highlighting is what PGGM says about the PetroChina/CNPC relationship (this bit is actually from Global Pensions):

"Ownership, governance and financial streams between CNPC and PetroChina overlap to such an extent that PGGM regards both organisations as a single entity."


To me that means that if your pension fund holds PetroChina you need to think about the activities of CNPC too. It is involved in both Sudan and Burma. So whilst PetroChina might seem 'clean' on first glance, the relationship with CNPC clearly complicates it.

Monday, 21 January 2008

Loss aversion and union sloganeering

"If we fight we may not win, but if we don't fight we'll surely lose."

I'm not sure where this quote originates from, but I am fairly certain I have seen Unite GS Tony Woodley use it at some point. And much as I am a weedy moderate, and generally dislike combative language, I think it works quite well.

One of the reasons for this might be that it taps into loss aversion, our strong instinct to try and avoid losses. This is a really key concept, and greatly clarifies understanding of how people assess risk. As the Wiki link explains we 'feel' losses more strongly than we do gains. This means the way that we approach gains and losses differs. We tend to favour limited certain gains over greater possible but not guaranteed gains. But we try to avoid a guaranteed loss, even if this means taking on the risk of a greater possible loss.

Isn't that exactly what the slogan at the top is doing? It is saying it is better to take a risk that might mean you manage to avoid a loss, than to accept a guaranteed loss. As such it is likely to have quite a bit of emotional pull.

Sunday, 20 January 2008

Why the MPs' pension fund shouldn't close

The more I think about it the more I think that the Tory policy recommendation that the MPs' pension scheme should be closed - as opposed to being made less generous - is a gimmick and a fundamentally bad idea. Unfortunately the Observer business section took the bait today and gets a dig in against public sector schemes -

David Cameron has proposed closing the scheme to new entrants, an idea that deserves a full hearing.

The deeper issue behind this is the widening chasm between 'gold-plated' public-sector pensions, funded by the taxpayer, and private-sector schemes, where benefits and security are evaporating. If public-sector pensions are gold-plated, then the parliamentary scheme is coated in platinum and studded with diamonds. Time for an overhaul.


I think this is wrong for several reasons, quite aside from the fact that closing the MPs' scheme will be used as a Tory tactic for softening up opinion ahead of an attack on public sector pensions as Cameron himself has made clear.

Firstly, if we give MPs a DC pension scheme with fairly typical (ie too small) contributions what incentive does this give them to promote anything better for the workforce as a whole? Some in the pensions industry are currently fighting a rearguard action to try and get risk-sharing schemes (ie neither DB nor pure DC) taken seriously. But if MPs are in a scheme where they take all the risk why would they think that other employees need something better?

On the same point there is a danger that the level that contributions are set at for the MPs' scheme both become seen as the 'gold standard' and contribute to framing and/or anchoring MPs' perceptions of what a reasonable contribution level is in a DC scheme. This will matter a lot if we ever try and improve the rates intended for Personal Accounts.

Secondly, it would clearly send out the message that DB is no longer a politically acceptable form of pension provision. A scheme which is under no pressure to close will be closed to make a political point. Although this might make sense to the Right in terms of am attack on the public sector, what impression is that going to give to the minority of private sector employers trying to keep DB going? How should an organisation like the NAPF (which incidentally has a DB scheme for staff) respond?

Finally, isn't doing this, and attacking public sector workers' pensions, actually doing exactly what those on the Right always accuse the Left of wanting to do - dragging everyone down to the same level? Almost everyone seems to think that most of the DC schemes that have been set up in the private sector are not generous enough. So surely we should focus our attention on sorting that out - rather than trying to take away good pensions in the public sector?

As such, whilst I think there is a case for making the MPs' scheme less generous, closing it entirely would be a bad idea for everyone else, despite its gimmicky appeal to politician-haters. It will be interesting to see how the pensions industry reacts.

Saturday, 19 January 2008

Still following the money

A quick update on how fund managers voted on Caledonia Investments giving £60K to the Tories at the investment trust's AGM back in July.

Baillie Gifford voted AGAINST the proposal. If you download their Q3 voting report here you can see the vote on page 9.

The list so far -

Baillie Gifford - AGAINST
Co-operative Insurance - AGAINST
F&C - AGAINST
Insight Investment - FOR
M&G - ABSTAIN

Tories, unions and corporate governance

I was interested by this piece on A Very Public Sociologist about a policy report from the Centre for Policy Studies on trade union funding for Labour. I don't really pay the CPS any attention as they don't really have any influence at present, although I did read an interesting-ish paper with their imprint about the performance of the stockmarket under Labour governments (guess what - it's not been great). You can download it from their website here if you search for the author John Littlewood.

Anyway, what caught my eye in the AVPS post about the paper on unions was the name of one of the authors - Jonathan Djanogly - who is MP for Huntingdon and shadow DBERR minister. Judging by his website and the CPS pamphlet he really isn't that keen on unions.

Now I've never met the bloke, but his name has popped up on my radar a few times in the past. I know he is involved with the All-Party Parliamentary Corporate Governance Group (which doesn't look to have enough Labour members!). But why I really remember him is because of his involvement in the battle over disclosure of voting records by institutional investors. The Tories opposed the Government's limited intervention - taking a reserve power in the Companies Bill that could mandate disclosure, but not using it, yet. They even managed - with the aid of Lib Dems - to defeat the Government in Lords over this and get the relevant clause taken out, but it was subsequently reinserted.

Notably he took the industry arguments hook, line and sinker - mandatory disclosure would damage engagement etc. He even managed to get in a quick dig at the unions:

On one side stand the CBI and many institutional investors who resent being forced to disclose how they vote, and on the other stand the Government, who frequently appear to be taking orders on clause 1241 from the trade unions. (from Hansard see column 1031)


I had to chuckle when I saw this given that at the time I was working for the unions trying to get mandatory disclosure. The idea that we could just tell the Government what to do on this issue is literally laughable. And given the significant effort that the industry put into trying to keep their voting a secret I think Labour deserves a bit of credit to sticking to its guns (though I still think they should have just made it mandatory). Incidentally if you keep reading that bit of Hansard he goes on to name two fund managers who currently disclose their voting. Hermes is one, have a guess who the other is - £415,500 if you get it right...

Has a voluntary approach worked? I don't think so. Still only a small minority of fund manages disclose voting. I can only think of one - Baillie Gifford - that has started disclosing since the reserve power came in. And according to Mr Djanogly if you don't like it that's your problem -

An open and transparent institution is likely to be a successful one, but if an institution wishes to maintain secrecy with its investors, that should be its choice, and we should respect that. People do not have to invest with it.

Friday, 18 January 2008

More on US union investor activism

Don't want to look like I'm favouring the 'splitters' so here are some links to work the AFL-CIO Office of Investment is involved with.

The main Office of Investment site is here:

http://www.aflcio.org/corporatewatch/capital/corporategovernance.cfm


If you click on the company initiatives link you can see that the AFL-CIO has been targeting the banks:

AFL-CIO Calls on Subprime Lenders to Halt Foreclosures

As the top five Wall Street firms hand out a record $38 billion in bonuses, the AFL-CIO called for an immediate one-year moratorium on subprime mortgage foreclosures. A sample letter sent to Citigroup is below. In addition to Citigroup, copies of the letter were sent to Countrywide, Merrill Lynch, Bear Stearns, Morgan Stanley, Wells Fargo, Lehman Brothers, JP Morgan Chase, Goldman Sachs, Washington Mutual and RBS.



And looking further down you can see some engagement in relation to Burma:

Chevron's Operations in Burma

The AFL-CIO urged Chevron to speak out against Burma's brutul crackdown on peaceful demonstrations by monks. Chevron remains the only U.S. company with significant assets in Burma and is in part responsible for the transfer of millions of dollars to Burma's military regime. It also funds a trade association, which lobbies the federal government and Congress against the imposition of economic sanctions on Burma despite the regime's egregious abuse of human rights.



You can also download the annual proxy voting survey in this section. As I have said before, the US unions are miles ahead of the UK in using shareholder engagement as a tool

Thursday, 17 January 2008

Geeky derelict station thrills

Massively off-topic but I thought I would give this site a plug as I find it fascinating and when mentioning my bizarre interest I've found that a few people share it:

Disused Stations

My local station actually has disused platforms and can be seen here.

If you like that you might also like this one about old tube stations:

Underground History

And this one about knackered old bits of London:

Derelict London

US union investor activists target Merrills and Citigroup

The US unions are real pioneers when it comes to using shareholder engagement as a tool for the labour movement, so it's no surprise to see them getting stuck into the big banks over their shameful record in the sub-prime crisis.

Change To Win investment group is going after both Merrill Lynch and Citigroup. Maybe something similar is in order in the UK?

Wednesday, 16 January 2008

George Orwell and cognitive biases

I think Notes On Nationalism is one of the most interesting things that Orwell ever wrote. Although his use of the term 'nationalist' is a bit unhelpful, the article itself is great and is, in my view, an early example of someone trying to grapple with cognitive biases as they affect politics.

Not only that, but he also makes the case that we should try and challenge our biases. I think this is spot on, and that we should always be alert to the fact that some beliefs might simply be more convenient or more enjoyable to hold than others, and that might be the reason why we hold them, rather than because we have any particular understanding of a given issue.

Whether it is possible to get rid of them I do not know, but I do believe that it is possible to struggle against them, and that this is essentially a MORAL effort. It is a question first of all of discovering what one really is, what one's own feelings really are, and then of making allowance for the inevitable bias. If you hate and fear Russia, if you are jealous of the wealth and power of America, if you despise Jews, if you have a sentiment of inferiority towards the British ruling class, you cannot get rid of those feelings simply by taking thought. But you can at least recognise that you have them, and prevent them from contaminating your mental processes.

The emotional urges which are inescapable, and are perhaps even necessary to political action, should be able to exist side by side with an acceptance of reality. But this, I repeat, needs a MORAL effort, and contemporary English literature, so far as it is alive at all to the major issues of our time, shows how few of us are prepared to make it.

Tory-free investing

Hopefully this might be of use to those of you out there who are worried about being involved with an investment product provider who funds the Tories. Remember that it's not just about the product itself, you may also have a link depending on how you set up your investment. If you are investing via the Funds Network fund supermarket you are still giving money to Fidelity, who in turn give hundreds of thousands of pounds to the Tories.

However there are alternatives, so if you want to invest via a fund supermarket that isn't tied to a politically aligned fund manager have a look at Cofunds. Our financial adviser has checked this out for us and Cofunds don't make any political donations. So consider switching if you use Funds Network.

Northern Rock & the Telegraph


Yesterday's Northern Rock EGM provided a bit of corporate theatre, as two hedge funds had filed a number of shareholder resolutions. They also used the opportunity to lay into who they thought was to blame for the NR crisis... the Bank of England. According to the Telegraph:

Mr Wood called for Mr King not to be reappointed for a second term, a decision on which is expected in the next few weeks.

He said: "It was his faul... when Northern Rock went to borrow from the lender of last resort facility, they were told: 'No, you can't'. They forced Northern Rock to be shamed and publicly named, and of course, people wanted to take their money out."

"On one day alone recently, €500bn (£377bn) was borrowed from the European Central Bank by over 400 banks. So why should Northern Rock suffer? All Mervyn King had to do was what everyone else did."

Philip Richards, though resisting any personal attacks on Mr King, added: "To say there is a moral case for nationalisation is perverse after it was borne out of a mishandling of the crisis by the Bank of England."


I actually think this is a bit of blather. The hedge funds took a punt and got it wrong. With the threat of nationalisation looming and no idea what price the shares might be acquired for they can't afford to wind the Government up by blaming Darling etc, hence the BoE makes an alternative target.

Actually the Telegraph business comment nails this one quite fairly -

That is what risk capital is all about. Investors in Northern Rock backed a company with a flawed business model. It was a gamble that didn't pay off, just as the hedge funds' later punt has not.

That doesn't stop my personal favourite columnist Jeff Randall from blundering in. Today he says that CSFB analyst Jonathan Pierce was one Cityboy who spotted that the Rock was a crock -

All last year, CSFB was urging clients to sell the Rock's shares. As the price went down and down, Pierce simply reiterated his negative stance. He is one of only a few to emerge from this fiasco with an enhanced rating.


Get that - one of only a few to spot the problem before it happened. I wholeheartedly agree that most missed it, it's just that a previous column in the Telegraph business section last November suggested that City did all it could in respect of NR to signal there was a problem, and had been doing so from the start of 2007. (Although strangely voting at NR's AGM in April suggested that the City was giving the bank the thumbs up).

At the start of the year, the stock market began signalling that the company was in trouble: from a peak of £12.50, its share price halved and then halved again. Short of setting off an air-raid siren, it's hard to see what more the City could have done.


No prizes for guessing the author.

Tuesday, 15 January 2008

SHARE proxy voting survey


I admit I'm a geek about such things, but this is one of the things I look forward to each year - the publication of proxy voting research. It's always interesting to see how different fund managers stack up when it comes to the way they vote. Labour-aligned Canadian shareholder advocate SHARE has just published its annual survey which you can download here and the press release about the report is here. Definitely worth a read, if only to encourage trustees to take these things seriously. More importantly get control of those votes!

EMI and the Long Tail

This line caught my eye in the interview with Terra Firma's Guy Hands in the FT yesterday:

Mr Hands hinted at a clear-out of EMI Music's roster of 14,000 artists, saying just 200 of them made most of its revenues each year.


This sounds like someone trying to focus on the 'bankers' that sell well, rather than less popular artists who are hit and miss. How then does this fit in with the brave new world of the Long Tail? It seems like EMI could go in the opposite direction.

I realise EMI isn't an online business, but those it sells music to are. Weren't online music retailers one example of the long tail in practice? But if EMI isn't going to keep less popular artists on the books, how is their music going to end up getting liscenced on iTunes etc? Or am I missing something?

Monday, 14 January 2008

Cameron on public sector pension 'reform'

From this article on IPE:

"I think that if MPs want to look other state sector employees in the eye, and say we really do need to look at and reform pension arrangements to make them affordable, we have to look at our own arrangements and recognise that a very generous final salary scheme going into the future is not appropriate."

In addition, he said the change would help address the "deeper issue" of the growing divide between public and private sector pension schemes, and argued "that kind of pensions apartheid" should not be allowed to grow up in Britain.

So it is a way to provide cover for an attack on public sector workers' pensions. Bear in mind that the recommendation is that the MPs' scheme goes DC - see page 2 of the doc the Tories launched today and downloadable here - so what do you think they have in mind for the public sector?

Bits and pieces

A couple of snippets from today's papers that are worth highlighting. First up in the FT's interview with Simon Walker, head of the BVCA (the private equity trade body) it's interesting to note that he again raises the issue of unions investing in the asset class -

He will point out to unions that many of their members' pension funds are investing in the same private equity firms they criticise so loudly.

This is a strange thing to 'point out' for a number of reasons. First I'm not aware of any unions arguing that non-one should invest in private equity. Second I know that unions are well aware that they are exposed to the asset class both directly in some cases and that they have trustees on fund that invest in PE.

Thirdly, and most importantly, so what? Why should the fact that you invest in an asset class preclude you from criticising the behaviour of a business associated with it? It's a bit like saying that because unions invest in equities therefore they are hypocrites if they criticise public companies. Or if you think PE funds are more akin to fund managers, then presumably unions would be hypocrites if they criticise, for example, the poor level of voting disclosure by equity managers. Surely it's better to have some bolshy customers involved in PE than every investor to just talk breathlessly about the great returns they get without looking at how they are generated.

The second interesting bit is buried right in the bottom of this article about the Tories' donation headaches. David Cameron is apparently gfoing to call for the MPs pension scheme to be closed.

He also called for the closing of MPs' final salary pension scheme, which is regarded by experts as more generous than available to most workers.

Interesting move. Just a thought but it would, of course, make it much easier politically for him as PM to shut public sector workers' schemes if his MPs didn't benefit from a far more generous scheme themselves.

Finally, it turns out T Blair is actually going to be paid about £2.5m a year by JP Morgan, not the £500k it had been suggested. However I try and stack this one up it just seems wrong to me that an ex-Labour leader is taking millions a year from an investment bank.

Sunday, 13 January 2008

Private equity vs music

There's a bit in today's Observer about plans by EMI's new private equity owner to cut back staff. This will be an interesting case to watch as it is a big name brand and the deal took place before the credit crunch hit home. So it is the sort of case that should tell us more about what private equity really does. Already Terra Tirma has had a fight with the EMI pension fund trustees, now it is planning to cull staff, and some of EMI's big name artists are unhappy.

Saturday, 12 January 2008

Divestment doubts

There's a well-argued piece from a former public pension fund trustee in Pensions & Investments making the case against divestment. I agree with pretty much all of it. Divestment in my view is strategically nonsensical since you lose your voice and the shares you sell will simply be bought by someone who clearly isn't bothered by the issues that caused you to divest. I also doubt divestment has any impact on the company, barring a bit of reputational damage if it's a big shareholder selling out.

I think you need to make a few exceptions though. It's obviously important for values-driven organisations to have the divestment option open. Why should a cancer charity have investments in tobacco firms for example. Equally at some point if your concerns about a given company are that strong it seems bizarre to keep engaging. But for most pension funds most of the time divestment is a dead end.

However I had a bit of a chuckle about the last line in the P&I article. Only Americans can write this sort of thing with a straight face surely?

Divest and the terrorists win.

Canadian shareholders turn down say on pay

Here's something a bit odd, the Canadian Coalition for Good Governance has said that it won't support regulatory changes that introduce an advisory investor vote on remuneration, or necessarily back resolutions seeking to make companies adopt a vote.

"It is the role of the board, and in particular the compensation committee, to establish appropriate executive compensation plans that clearly align the interests of shareholders and management," said David Beatty, Managing Director, Canadian Coalition for Good Governance. "By working constructively with corporate Canada, organizations like ours can provide perspective on the difficult balance between market forces and shareholder interests in the arena of executive pay but it is not our role to find that balance."

"We will look to corporate Canada to continue to improve the executive compensation process. Moving forward, if we feel progress on this issue has stalled, we may support resolutions such as "Say on Pay" to ensure the voice of the shareholder is heard," said Beatty.


Full release here.

Friday, 11 January 2008

Anti-anti-war propaganda and knowledge

I found this article in the WSJ, following a link in a comment on the perpetually outraged SWP-aligned blog Lenin's Tomb. For once the Trots actually have a fair reason to kick off as this opinion piece is pretty rubbish, as you can tell from the first para.

Three weeks before the 2006 elections, the British medical journal Lancet published a bombshell report estimating that casualties in Iraq had exceeded 650,000 since the U.S.-led invasion in March 2003. We know that number was wildly exaggerated. The news is that now we know why.


The last two sentences really bother me. The assertion is broadly that you can know that a proposition is false without knowing why. Maybe I've been reading too much blah about epistemology lately, but I'm a bit sceptical that this is actually possible. I use my own lack of knowledge on this subject as a case in point. I also found the Lancet figure problematic, it sounded way too high. But if I am honest my 'knowledge' of the real level of deaths in Iraq is drawn solely from the media, and has no empirical basis. It is therefore quite possible/likely that my idea of what of a reasonable estimate of these numbers would be is anchored by previous numbers that I have heard used (for example by Iraq Body Count).

I don't therefore think that my feeling that the Lancet figure was wrong is justified true belief, and from reading the WSJ piece I'm fairly sure the author is in the same boat. I would argue that whoever wrote the WSJ piece believed, rather than knew, that the Lancet figures were exaggerated, and based on what they have written I don't think they know 'why' they hold the belief either. The 'justification' (the 'why') does not 'justify'. Therefore this article is actually more a useful example of confirmation bias in practice than anything else.

For example, when you look at the actual 'evidence' the WSJ uses to explain 'why' the report exaggerated the death toll in Iraq, the argument looks threadbare. It's principally a list of the political affiliations of those involved with producing, funding and publishing the report, not an examination of their data or methodology. In other words the report findings are wonky because of the politics of those involved. I'm not at all questioning that beliefs can influence our assessment of evidence, but you need to prove that this has happened, not just imply that it has taken place. Otherwise it's just an ad hominem attack, surely?

The one bit in the article that gets anywhere close to querying the data is actually buried down the bottom. The legitimate criticism here is that the Iraqi researcher involved in the report did not make his data available to others. But it isn't explored any further. The point that he also made claims about depleted uranium is again more along the lines of 'he says things we don't like, therefore his evidence is flawed'.

Finally, the last paragraph is also worth a look:

In other words, the Lancet study could hardly be more unreliable. Yet it was trumpeted by the political left because it fit a narrative that they wanted to believe. And it wasn't challenged by much of the press because it told them what they wanted to hear. The truth was irrelevant.


As regular readers will know, I enjoy the exposure of narratives masquerading as knowledge, but there are several things wrong with this. On a practical point from what I remember the Lancet study was challenged in a number of places. I certainly debated it with people on messageboards, and I remember Dubya's comment that the study was 'not credible' being featured in media reports. Secondly, the article does not prove that the Lancet report is unreliable, even though I share the belief (rather than justifed true belief, ie knowledge) that the figures do not stack up.

But more broadly the paragraph could have been written about the coverage of any number of reports by non-specialist media. Skewed and unreliable reports are trumpeted by differing political factions all the time. And if the line being advanced fits the narrative the media want then such studies get swallowed hook, line and sinker. Shockingly this applies to Fox News and the WSJ as much as it does to the BBC and The Grauniad. So while I agree with the thrust of the WSJ's piece here personally I think it's not really a comment about the Lancet report, or the claims of the anti-war movement. It's actually a comment about how unreliable the media can be as sources of information - a point this article itself unwittingly demonstrates very well.

Thursday, 10 January 2008

Delegating 'ownership' to fund managers is a bad idea

From this article on Responsible Investor:

Unfortunately many of the asset managers that have been most successful at winning equity mandates from pension funds in recent years happen to fall into the non-activist category. This means that pension funds who hope to deliver on their UN PRI active ownership commitments by delegating to their existing equity managers are likely to be disappointed.

It also begs a question about the extent to which these non-activist asset managers are currently meeting the requirements specified by their mandates from pension funds. Several pension funds have told me that they are not very happy with the level of active ownership displayed by their asset managers. However, they have indicated that this is not a sackable offence. While an asset manager is delivering satisfactory investment performance, it is hard for fiduciary investors to sack them for non-performance on this topic. Conversely, it is difficult for a fiduciary investor to appoint an equity manager simply because of excellent active ownership capability, unless this is accompanied by top decile investment capability. This combination has not frequently arisen in recent years.

This creates a problem: the most commercially successful pension fund equity managers tend not to implement active ownership effectively while the most effective active ownership managers tend not to win equity mandates.


Spot on.

The UK's most generous pensions - again

Just spotted this bit on the TaxpayersAlliance site. As I posted the other day, I actually agree that MPs pensions are too generous, but I want to focus on the bit from Ros Altmann:

Ros Altmann of the Pensions Action Group said: 'MPs in the past have voted themselves the most generous pensions of just about anywhere in the world.

'There must be one or two top directors who have voted themselves something more generous but that's about it.'


I'm fairly sure this is off the mark. Accrual rates of 1/30th have been very common in boardrooms in the UK in recent history. So I would be pretty confident in saying that more directors than MPs have benefitted from super-generous DB schemes. What's more directors continue to benefit from preferential decision when the DB to DC shift occurs - they typically receive much higher company contributions than other employees in the same business. I can't see any justification for this whatsoever.

Off on a tangent and thinking about MPs pay and conditions, I find myself sharing a bit of common ground with the views of this Tory blogger. I'm not sure I agree about the point about outside directorships, but I am wary of 'professional' politicians and I agree that MPs are NOT paid too much given the amount of time and dedication the job entails.

Fidelity's Tory donations have been raised in parliament

Hat tip to a contact at a fund management house (not Fidelity obviously!) for alerting me to this. Fidelity's donations to the Tories were cited in the debate on political funding in the House of Commons back in December. The donations were actually raised by a Lib Dem MP called David Heath. See this page in Hansard from 4th December (you'll need to scroll down).

When we are considering ethical issues and investments, I can give another example. I invite the Conservatives to take this one seriously, because it relates to them. They have received a series of donations from a company called Fidelity. The last such donation was for £25,000 in July. Fidelity deals with those who are creating the circumstances of genocide in Darfur. Darfur is a matter of great interest to hon. Members on both sides of the House and the Leader of the Opposition has often spoken about that issue—


On a personal note, me and the Mrs have agreed that we are going to move our money elsewhere, and I've emailed our financial adviser to arrange for a chat about who we should invest with instead (any fund managers reading this feel free to pitch for the business by leaving a comment!).

UPDATE: I've also spotted that Fidelity hosted a meeting of the Enterprise Forum - a Tory business liaison group - in Feb last year. See this bit.

Wednesday, 9 January 2008

GMB on pensions bill

Full statement is here, below are the key points on Personal Accounts. Note the emphasis on 50/50 trustees on the PAs board.

Personal Accounts
GMB welcomes the introduction of Personal Accounts (PAs) but has some concerns about the enforcement regime that will be applied and the level of the savings that are likely to be produced.


Holders or potential holders of PAs should not be subject to less favourable treatment by their employer on the basis of their pension choice

Government (through PADA if necessary) must ensure a proactive enforcement approach that monitors PA take up and investigates employers with low take up

There must be a genuine penalty for employers that do not fulfil their obligations including the payment of all contributions the employer’s failure has caused the jobholder to lose out on

Auto-enrolment is key, the automatic re-enrolment of jobholders should occur no less frequently than every three years irrespective of whether it is the exempt scheme or PA framework in place

The use of the individual opt out must be a decision taken by the individual without interference from their employer or other individuals on behalf of the employer

Exempt schemes should be genuinely better value for the jobholder than PAs, in the case of defined benefit schemes, this should include reference to the member contribution rate

GMB believes that the contribution levels proposed provide an absolute minimum, employers and employees should be facilitated and encouraged to contribute more where appropriate

The start up rate of contributions (8% of banded earnings) should be reviewed regularly in a similar manner to the review of the National Minimum Wage by the Low Pay Commission

GMB is disappointed that the banding of contributions is proposed. The limitation of employer contributions to 3% of earnings between £5,035 and £33,540 rewards low paying employers and disadvantages a key section of the current non saving working population: part time workers, particularly those with multiple employments

GMB believes that the employer contribution should be paid on all earnings up to £33,540 with an option for the individual to contribute on the first £5,035

Given the advanced notice employers are having of the introduction of PAs, GMB does not believe there is any need to phase in the mandatory contributions

The governance arrangements for PAs should include representation of members in line with the government’s commitment to have 50% member nominated trustees in occupational pension schemes

Government should monitor the effects of the annual limit on contributions of £3,600 and review whether a lifetime limit would increase flexibility and assist target groups such as those who have taken career breaks and wish to make up missed contributions

PAs should have the facility to accept transfers in to improve the efficiency of individuals’ lifetime pension savings

Tuesday, 8 January 2008

Leeds United pension scheme

I must be amongst a small number of people bored/geeky enough to follow which pension schemes end up in the Pension Protection Fund. Having a look today I stumbled across the one below, which is apparently current being assessed by the PPF (scroll down to July). How the mighty have fallen!

The Football League Ltd Pension & Life Assurance Scheme (Leeds United section)

Legal challenge to Cowan v Scargill ruling?


Here's an interesting bit from the Responsible Investor website:




One of the biggest legal barriers to UK pension funds making ethical decisions on their investments – the Cowan v Scargill ruling – could face a legal challenge from trades unions as part of an ongoing battle over the investment policy of the £4.2bn (€5.8bn) Merseyside pension fund.

Members of the Trades Union Congress (TUC), the umbrella organisation of UK unions, say they are taking legal advice after the fund’s trustee board voted against resolutions to halt investments in companies involved in the arms trade.
The unions say they will mount a fresh challenge to the pension fund’s investment policy at a meeting on January 28th.

In November, 2007, the Merseyside Pension fund trustee board voted unanimously against motions put forward by the councils of Liverpool and St Helens to ban arms investments. Liverpool council’s resolution said: “Investment in the arms trade is not compatible with good corporate, social and ethical governance”. The councils have two trustee representatives on a board of seventeen.

Alec McFadden, president of the TUC in the North West of England, said the union, which has members that belong to the scheme, wanted withdrawal of money from companies producing cluster bombs. He said it was contacting European pension funds who have made similar boycotts: “We want to fight the fact that the pension fund is invested in these companies and we are being told that the reason is because it has to invest for purely financial reasons because of Cowan v Scargill. We disagree and we will fight this.”

Dutch pension giants ABP and PGGM stopped investing in companies making cluster bombs after coming under fire in a Dutch current affairs programme that prompted thousands of complaints from pension scheme members. McFadden said the union had taken legal advice over a challenge to Cowan v Scargill and that lawyers have told it they could take the case on pro bono.

The Merseyside pension fund is understood to have about £14m linked to investments with firms that are involved in aspects of the arms trade, including BAE, Boeing and Rolls-Royce, much of which is invested in passive funds.

Yoof and capital stewardship

I somehow missed this in Unison's bulletin for young members last year. See two articles on pages 2 to 4.

US pension schemes warn buyout funds over tax

This is from yesterday's FT. US pension funds at least seem to recognise that they are the customer. Pity our funds in the UK seem to be in awe of the private equity industry and as such have been silent over the question of taxation.

Big public pension funds have warned they will stop investing in buy-out funds if private equity groups raise their fees to recoup higher US taxes on executives’ earnings. Senior officials from the $65bn Oregon Public Employees Retirement System and the $170bn-plus California State Teachers’ Retirement System (Calstrs), told the Financial Times they would oppose any attempt by buy-out funds to increase the percentage of investment profits they withhold from investors.

The stance by two of the biggest investors in private equity could prompt other big pension funds to follow suit, sparking a confrontation between the private equity industry and its largest and most loyal investor base. “I think there would be pretty stiff resistance to that kind of a fee raise,” said Ron Schmitz, chief investment officer at Oregon’s state pension fund. “I’m sure one or two buy-out funds might try that, but we’ll walk away”.

Private equity executives have floated the idea that if Washington goes ahead with plans to raise the tax on their profit from the current 15 per cent to 35 per cent they would pass it on to their investors in the form of higher fees. Investors in private equity funds typically pay a fee of 2 per cent of assets under management and 20 per cent of profits above a predetermined benchmark. The latter, known as “carried interest” is the main source of compensation for private equity executives and their lieutenants.

Christopher Ailiman, Calstrs’ chief investment officer, said some buy-out funds had threatened to increase “carried interest” to more than 20 per cent in order to cushion the blow of higher taxes on their income. “We have to stop and say no: the deal is still what it was regardless of the income tax situation,” Mr Ailman said.

Monday, 7 January 2008

Fidelity is also employing a Tory MP as a consultant

Well it pays to do a bit of digging. I have now discovered that the Fidelity-Tory relationship actually goes deeper than I had realised. I don't know why I didn't think of this before but I had a quick look on TheyWorkForYou.com and it turns out that in addition to being a major corporate donor to the Tories, Fidelity is also employing Tory MP John Stanley as a consultant on financial services. Check it out here. It's a bit odd as his biog doesn't mention anything about financial services and here's what They Work For You says about his apparent interests -

Asks most questions about

Departments: Foreign and Commonwealth Affairs, Health, Home Department, Transport, Defence

Subjects (based on headings added by Hansard): Iraq, Correspondence, Pandemic Influenza, Gibraltar, Community Hospitals

The website also indicates that Fidelity have also employed him in the past as a director on one of their investment trusts, see the entry under November 2005 here. And there's another obvious link here by the way, John Stanley is MP for Tonbridge and Malling, Fidelity Investments has its UK HQ in Tonbridge.

I need to talk this over with my other half, but I can't really see how we can stay with a fund manager that is so blatantly pro-Tory. I'll keep digging and update shortly.

Another letter to Fidelity

Not from me this time. See this piece on the LabourHome website. Interesting to note that Labour councillors on local govt funds that employ Fidelity aren't happy. That's the risk you run when you make partisan political donations though. With this in mind I'm going to email the story to the chair of my local council pension fund who I know in order to make him aware of the issue.

Sunday, 6 January 2008

The UK's most generous pension schemes

Based on some of the commentary you hear from the Tories (and sometimes the Lib Dems), and unfortunately also from the pensions industry sometimes, you might assume that public sector pension schemes were somehow uniquely and unjustifiably generous.

Not so. Luckily, because unions are still strong in the public sector, we have managed to retain decent final salary schemes, but even here there have been 'reforms' (ie higher normal retirement age for new starters). Public sector schemes were comparable to typical private sector schemes until a few years ago when the pension crisis kicked in. It's not public sector pensions that are unjustifiably generous, it's private sector pensions that have become unjustifiably poor. As I have argued many times before, the withdrawal by employers of decent pension provision in the private sector is a massive defeat for the labour movement and, in my opinion, effectively a significant (but unrecognised) pay cut.

This isn't so say there aren't some outlier pension schemes with extremely generous terms still out there - there are. Most people will be familiar with the example pf the MPs pension scheme. This is a final salary scheme with a normal accrual rate of 1/50ths, although members can opt to pay a higher contribution rate to gain an accrual rate of 1/40ths. I think the normal retirement age is 65. As much as I hate agreeing with the likes of the Daily Mail, I do struggle to see the justification for MPs getting a pension scheme that is more generous than those for almost all other people in the UK. Maybe they should have a scheme that reflects average final salary provision across the workforce as a whole?

I say that MPs have a pension scheme that is more generous than those for almost everyone else with good reason. Because directors of large companies award themselves pensions that are more generous than any other I have come across in the UK. Where they are offered final salary schemes, a large number of directors have an accrual rate of 1/30ths, and most have a normal retirement age of 60. And even when they do get offered defined contribution provision, directors get a much higher contribution rate from the company - on average 20%! What makes this worse is that employees in the same companies get a much worse deal. See the TUC's annual Pensionswatch report for more details.

Now I accept that those with significant responsibilities in charge of large organisations are going to be paid more than the rest of us, but that already means that they are going to get larger pensions. Why should they also get better accrual or contribution rates to boost their provision further? To me that really is unjustifiable. Incidentally the TUC argues that the solution is for directors to be in the same type of scheme on the same terms as their employers. So if directors get DB, staff get DB, and if directors get to draw an unreduced pension at 60, so does the rest of the workforce. Sounds sensible to me?

Friday, 4 January 2008

Fidelity replies... again

The mystery deepens... I've just got home from work to find a response from Fidelity. In my last letter I asked them if they planned to make future donations to the Tories, and why they have only made donations to the Tories. I also made it clear that I needed to know whether they plan to make future donations as this will affect whether we keep our savings with them.

They don't answer either question, and what's more it turns out that they have a policy not to discuss their future plans for political donations which applies to all clients, so unfortunately they can't tell me. It would be interesting to see if a pension fund client would receive the same response.

In the meantime I'm going to think over what to do next. Clearly I don't want to leave our money with a Tory-supporting fund manager. But equally I don't want to go through the hassle and expense of switching if the donations have ceased. If Fidelity donated to the Tories in Q4 of 2007 this probably won't appear on the Electoral Commission website for another month or so.

I'll update you with our future plans shortly, until then here's the latest letter. (by the way my surname isn't XXX, unfortunately)

Dear Mr XXX

Thank you for your letter regarding Fidelity donations received on 18 December 2007. I am sorry you were not satisfied with our response.

I understand you want a clear answer on the intention behind Fidelity's donations, and our future plans regarding our donations.

As previously stated, we make donations to political parties as part of a wider programme of activity to foster debate on key policy issues that may affect our clients. All our donations are made public through the electoral commission's website and are available for all to see.

I must reiterate that we cannot discuss our plans for future donations. I'm sorry I cannot be of any further help in this regard, but this is a Fidelity policy inclusive of all clients and we cannot make an exception in this case.

I appreciate that you disagree with particular donations that have been previously made by Fidelity, and that these may affect your decision regarding your investment with us. We greatly value your business and are saddened that you are considering moving your investments elsewhere due to this issue. Unfortunately, we cannot change our position on this matter.

If you remain dissatisfied with my response, you can refere your complaint to the Financial Ombudsman Service (FOS), at the address that was given in my previous correspondence.

If you should require any further information please do not hesitate to contact me directly on XXX. My extension number is XXX and I am available Minday to Friday from 9am to 6pm.

Yours sincerely

'Milking' pension schemes

Here's a bit of strange comment from a marketing person at Gissings (a second-tier actuarial firm). It is in response to news that both the Pension Protection Fund levy and the general levy (that pays for the Pensions Regulator, Ombudsman etc) are increasing:

"Surely these organisations must realise that cost control is vital. They cannot allow themselves to be considered to be arrogantly milking pension schemes at will. What they are doing is tantamount to a tax on pension funds."

According to the story the comment appeared in - which is here - the levies will jointly total £62m over the following year, of which about £20m is for the PPF. Funnily enough the NAPF also makes a bit of a point about the increase in levies, which it says have gone up 530% since 2005 (see the table at the bottom of page 3 of this release).

So here come my grumbles. First the increase in levies isn't that surprising given that the PPF one is only a couple of years old (which probably explains the NAPF figure) plus the evolving nature of it. Equally some of us think its a good thing that pension schemes pay levies that fund a protection fund that covers all of them (like an insurance policy) and as such incentivises responsible stewardship of assets.

But more annoying is the idea that this is 'milking' pension funds. For one, these levies have a clear purpose. Also people who work for the likes of the PPF, Pensions Regulator, Ombudsman etc I have no doubt are paid less than other organisations - like consulting actuarial firms - that also charge schemes money. As I have posted about before, my local council fund pays out approx £2m in fund management fees a year, and that's a relatively small fund in local government pension scheme terms. And I am deeply sceptical that active fund management is even worth paying for!

By all means let's keep a close eye on how the levies are spent. But let's also bear in mind that the entire pensions industry owes its livelihood to the charges it takes out of pension schemes - typically much higher that regulatory levies. You never see a fund manager turn up in a cheap suit do you? Who is really doing the milking? One to remember next time your fund manager offers you a 'free' corporate jolly.

Follow the money...

I'm still digging around to see which fund managers voted in favour of Caledonia Investments giving £60K to the Tories at the investment trust's AGM back in July. See previous posts here and here.

My latest discovery is that M&G (the Pru's retail fund management business) ABSTAINED on the proposal. See page 93 here, proposal number 15.

The list so far -

Co-operative Insurance - AGAINST
F&C - AGAINST
Insight Investment - FOR
M&G - ABSTAIN

I've also looked at the records of Hendersons and Standard Life, but neither feature it in their reports. However because these two report votes by exception (ie they don't report votes cast in favour of management) it's impossible to tell if they voted for the resolution or whether they simply didn't have an investment in Caledonia at the time. Yet another example of why a voluntarist approach to voting disclosure does not work effectively.

Thursday, 3 January 2008

Dubya drives Darfur disinvestment

How's that for alliteration? Full story here.

CRAWFORD, Texas (Reuters) - President George W. Bush on Monday signed into a law a measure aimed at allowing states, local governments, mutual funds and pension funds to divest from Sudan businesses, particularly its oil sectors.

Some 20 U.S. states have initiated divestment efforts because of the conflict in Sudan's Darfur region, which has taken some 200,000 lives and displaced some 2.5 million since rebels took up arms against the government in 2003.

But the effort in Illinois was challenged in court so the new law seeks to provide a legal framework for divestment from companies involved in Sudan's oil industry, mineral extraction, power production and the production of military equipment.

Bush has called the deaths in the Darfur conflict genocide, a charge the Sudanese government has rejected.

"My administration will continue its efforts to bring about significant improvements in the conditions in Sudan through sanctions against the government of Sudan and high-level diplomatic engagement and by supporting the deployment of peacekeepers in Darfur," Bush said in a statement.

But at the same time, he argued some provisions of the new law could interfere with his ability to conduct foreign policy and therefore he would "construe and enforce this legislation in a manner that does not conflict with that authority."

White House spokesman Scott Stanzel said the administration would review divestment policies adopted by states and local governments to ensure they are consistent with the president's foreign policy and take action if necessary.

But Stanzel stressed that Bush signed the measure because "the president broadly agrees with the aim of the sponsors, that doing business with Sudan should be discouraged."

Levelling down - who is to blame?

One thing you can't accuse the pensions industry of is reluctance to use alarmist language. Add to that its desire to see everything that goes wrong as being the fault of stupid, meddling politicians/civil servants. As an example of this, I was struck by the following bizarre assertion in the Association of Consulting Actuaries' pension scheme survey which you can find here. Having had a pop at the Government for not doing enough to prevent levelling down, the ACA claims -

"[T]he survey results from this and other surveys shows ample evidence that levelling-down has been happening for some time and is predicted to continue apace by those who run private sector firms and schemes."


Two things bother me about this. The first is that this paragraph - and much of the ACA's commentary in the report - seem to portray levelling down as an inevitable reaction to the Government's reforms. It suggests that firms have no choice but to close DB schemes and pay low contributions into DC schemes. Whilst I do not underestimate the cost pressures some companies are under, absolving them of any responsibility for the decisions they make in respect of pension provision for staff clearly goes too far. They have a choice whether to pay 3%, or 5% or zero.

Secondly, when people talk about 'levelling down' they mean the way that some firms will use the introduction of a minimum standard as a reason to reduce current provision to the specified minimum. Again they have a choice whether to do this. But you can see that since the Government is saying that employers only have to pay 3% into Personal Accounts this might offer unscrupulous employers the cover to reduce their contributions to that level if they are currently paying.

There's just one problem. Personal Accounts don't come into effect until 2012, so how can companies be 'levelling down' to something that doesn't exist? According to the ACA this has been happening for some time, but what exactly are employers levelling down to, since there is currently no minimum? In fact the reality is that many employers have always levelled down - to zero - which is why, even at its highpoint, occupational pension coverage never got much above half the workforce. That is exactly why some sort of minimum threshold is required. No doubt some employers will level down - and no doubt some will be advised on such decisions by consulting actuaries - but many employers will also have to level up. That means that coverage will increase, likely particularly amongst women.

The ACA commentary is particularly frustrating as much of the rest of what they say sounds sensible, for example their promotion of risk-sharing schemes (though these would of course provide work for... err... actuaries). But the kneejerk 'levelling down' commentary makes you question their judgement elsewhere.

Wednesday, 2 January 2008

Back to blogging

Finally back in London after a prolonged, family-visiting xmas which took in the twin cultural hotspots that are Ipswich and Bangor (the Northern Ireland one). As usual it was nice to spend a bit more time with family members we don't see that much, but it's also an opportunity to catch up on a bit of reading.

I finally managed to finish off Political Power and Corporate Control, which was well worth a read. It brings a much-needed political perspective to corporate governance, and as I have said before it's good to see a governance book take seriously the role of labour. It also sketches out why workers in liberal market economies might end up in a 'transparency coalition' with investors. This has happened in the US - unions are major players in shareholder activism - but has yet to take off here in the UK, which is something I'll come back to in a post another day.

Also I can't resist a quote from the very last page of the book where the authors comment on the changing rhetoric adopted in governance debates -

"[W]hen managers fail to perform and make money for the shareholders, these managers often embrace broader rhetorical notions of accountability, ranging from employment stability to 'sustaniable' management, to 'serving our stakeholders' rather than mere investors. But when presented with efforts to change the rules of corporate governance to make them more accountable to strictly profit-making definitions of responsibility to shareholders, these same managers go the other way, embracing narrow rhetorical notions of corporate governance as a strictly economic function - suggesting that goverance reforms risk 'politicizing' the way firms are run, and thereby open the door to rent-seeking lawyers, bureaucratic meddling, and 'populist' forces interested in social agendas, not profit."


I presume the authors are mainly influenced by the US market in their comments here, and the debate over proxy access has seen many of these arguments trotted out (including a really awful editorial in the Wall Street Journal suggesting it was a union plot to get their people into the boardroom - if only it were that simple!). But it is also true of the UK, and not just of company management. More than once I have heard people claim that TU activity in respect of fund manager transparency is 'politicizing' investment management. Funnily enough, it's always opponents of the status quo who are 'political', whilst its defenders are not.