Worth a read

There's a City AM intereview with NAPF chair Lindsay Tomlinson here. He's always struck me as a very sensible bloke. Don't agree with some of his points (may blog later on this) but worth a read.

Sorry, NAPF!

In last night's post I contrasted the ABI's recent missive to the FTSE350 with the apparent silence on the part of the NAPF and the IMA. It turns out that (not for the first time) I shouted into the internet too quickly, and that the NAPF had actually also written to the FTSE350 with its own concerns about remuneration back in November. So there you are.

Hat-tip: Cheapside House Command Bunker

NAPF's odd comments part 2

The outgoing NAPF chair has repeated what he wrote to The Guardian at their annual conf it seems.

He said: "I am fed up with government ministers and regulators pointing the finger of blame at pension funds and pension fund trustees for the banking crisis. There are others far more culpable and they must shoulder their responsibility and look to put their own houses in order first."
Hitchen added schemes take their responsibility as corporate owners seriously.
However, he added: "Our job is to pay pensions, not to run the banks. And our influence is limited - today, we own just 13% of the UK stock market. It is ironic that as more and more DB pension funds enter run-off, driven in no small part by government and regulator-driven policies, we are now expected to come to the rescue of capitalism."

I just don't get what the issue is here. I don't think anyone is particularly blaming pension funds, and by that I mean two things. First, it is very clear that the principal focus of Walker etc is on the boards of companies themselves. Second, though there is (rightly) also a focus on the role of shareholders as owners, it's mainly aimed at asset managers isn't it?

Also I don't get the false choice that is suggested between taking ownership seriously and paying pensions. Again, if you read the Walker Review the focus on shareholder engagement is entirely based on the idea that this is in shareholders' financial self-interest. And this is corp gov basics, separation of ownership and control and all that. According to this way of thinking, surely, the existence of well-run companies (ie the survival of an important aspect of capitalism) directly contributes to the payment of pensions. That's why pension funds should be interested.

Finally, it is true that pension funds' influence is limited, and they account for a declining share of equity ownership. But let's be honest - most pension funds have never really tried to exert the influence that they do have. Ask any asset manager how many questions they get from clients about corporate governance etc. The client pressure on them to act like owners barely exists, whereas a perceived focus on short-term return does (I say perceived because pension funds claim they don't put such pressure on). If you feel that keeping your job has more to do with short-term returns than long-term ownership, what are you going to prioritise?

Unfortunately the language used above, which I am sure will have many an NAPF member nodding in favour, only reinforces the idea that corporate governance and ownership activity have no overlap with financial self-interest. If you want an example of why we have this ownership problem, this is it.

Exactly

If investors won't play the ownership role, policymakers will look to other alternatives.

It is partly the failure of institutional investors such as pension funds to voice concern or to pressure banks into better behaviour that has persuaded ministers to opt for the big stick of regulation. By behaving like neglectful absentee landlords (© Lord Myners), pension funds have encouraged policymakers to choose more onerous supervision.

Odd comments from the NAPF...

In this letter to The Grauniad earlier in the week:

Your interview (Too many UK firms fall into foreign hands, September 24), reports that City minister Lord Myners would "summon" the National Association of Pension Funds (NAPF) to a meeting to discuss what he perceives to be a lack of resources – and therefore commitment – on the part of occupational pension funds to raise standards of corporate governance. We are always happy to discuss matters withMyners and will be happy to do so again.
The NAPF is, and always has been, an "active driver of effective ownership", as the minister is aware – we actively engage with investee companies and our corporate governance guidelines are used by a leading voting agency. We see this as an integral part of building value for, and providing pensions to, scheme members, which is, after all, what pension funds are there to do.
Pension funds' priority is to ensure that they are able to pay pensions to their members. This alone presents many challenging issues, especially in the current environment. Government policies have forced pension schemes to close and they grapple with ever-growing deficits out of UK equities – to the extent that pension schemes now own less than 15% of the UK market. It is ironic indeed, then, that government now wants to call on pension schemes to be the saviours of capitalism.
Constructive comment – not unwarranted criticism – is what is needed from government.
Chris Hitchen

First thing, I'm not sure what the message is. If (ok - a big if) ownership activity is in funds' financial self-interest, as implied in para 2, how come it then appears to be contrasted with the 'proper job' of paying pensions, dealing with deficits etc in para 3?

Second, let's be absolutely clear about this - most private sector pension funds do diddley squat in this area. You can count the funds that make a serious go of it on the fingers of one hand just about. Anyone with any knowledge of the limited ownership activity by shareholders in the UK would tell you that the utter passivity of most pension funds is a big reason why more does not get done. If you think shareholders should act like owners, then arguably criticism of pension funds is actually pretty reasonable.

UPDATE: Nigel pointed out the TUC response here.

Institutional investors firing blanks says TUC

The annual TUC Fund Manager Voting Survey is published today, full version is here (PDF). It confirms a lot of what you probably expect - actually institutional investors as a whole didn't put much pressure on the banks on either pay or strategy in the run-up to the crisis, at least judged by how they used their voting rights.

The TUC's 2008 fund manager voting survey analyses the voting records of 20 fund managers and pensions funds between July 2007 and July 2008, including votes on banks' remuneration reports and the RBS acquisition of ABN Amro.

The survey shows that investors did not signal any great concern about remuneration reports at bank AGMs. HSBC was the only bank to receive less than 60 per cent for its remuneration report from the survey respondents. The report received just under 82 per cent support at its 2008 AGM.

The survey also shows that out of the respondents only one investor - Co-operative Insurance Society - opposed the acquisition of ABN Amro by RBS in 2007, which is now widely regarded as one of the worst deals in UK corporate history, despite receiving overwhelming support from RBS shareholders as a whole.

The survey reveals big differences between institutional investors in their general approach to boardroom pay. At one end of the scale six respondents supported every remuneration report covered in the survey while six of the respondents supported fewer than half.

A similar gap emerged in investor stances on incentive schemes. Eight respondents supported all incentive schemes in the survey and a further eight opposed the majority of schemes. Most of the respondents took the same position on both remuneration and incentive schemes, suggesting that they have a clearly defined stance on these issues.

It clearly points up the fact that there are differences between asset managers in terms of how pro-management they are. This point is obvious to anyone who spends any time looking at voting data, but many trustees still think that delegating voting to managers doesn't really matter. All I can say is that in that case don't be surprised if you find your pension fund has voted for somethings you don't like, and against some union-friendly initiatives.

Separately the NAPF has published a survey suggesting that pension funds are starting to put a bit of effort into activism. Quick blurb below, more on the NAPF website.

Key findings from the National Association of Pension Funds 2009 engagement survey show that nearly half (49%) of pension schemes will spend more time scrutinising the actions of their fund managers on engagement issues as a result of the economic crisis. Over three quarters of funds (78%) said they will give more time to reviewing reporting and 57% said they will pay more attention to votes cast.

New NAPF chair...

... is Lindsay Tomlinson from BGI, see NAPF site. Note he's not a pension fund representative - and if you look back this is not uncommon for NAPF chairs - but actually he's always struck me as one of the more thoughtful people in the fund management world. For example.

Pension fund spin

Lots of hooha today about the details leaked from the forthcoming NAPF Annual Survey that 1 in 4 large private sector organisation plans to close its final salary (the most common type of defined benefit (DB) scheme) to future accruals.

Just to be clear, the first wave of DB closures were to new members, so if you were already in the scheme you kept on building up benefits, but if you joined the firm post-closure you were offered something different. The second wave will mean that even those in DB schemes won't be able to accrue any more benefits within them, though previously accrued benefits remain untouched (until the third wave...?).

A few things to remember, as the BBC correctly noted last night, the NAPF has an agenda here. They want employers to have more freedom of movement, and their threat is that if they don't get it then more of this type of closure are in the pipeline. And they have a bit of a point.

Something else to watch out for is the way this will no doubt be used by anti-pension campaigners on the Right like the TPA as evidence that final salary schemes are unaffordable. A few points to counter - first, this is in one sense just a cost-cutting exercise by companies. They may simply want to spend less on pensions - it doesn't necessarily mean that they couldn't keep the schemes open to current members. Second, in a way this is a result of closing the schemes to new members in the first place - they can't rely on ongoing contributions from incoming members to play about with in terms of funding. Thirdly, the cost pressure on schemes is in no small part due to the extraordinary economic picture. We don't (well, most of us!) argue that private sector banks are fundamentally flawed because they currently need state support. Why does an extremely difficult economic climate say anything particular about different modes of pension provision.

Unfortunately the real losers are the members of the DC schemes that employers and the Right are so keen for us to be in. A mate at a fund management company I met the other day reckoned some retiring on a typical DC scheme today will probably get a pension worth one quarter of what they previously expected.

I'm not naive enough to think that we can bring back DB schemes in their previous form to the private sector. Once FDs woke up to the risk inherent in them they got shot quickly, and I suspect there's no appetite to go back. But neither can we simply ignore the scandal waiting in DC provision (which will be exacerbated by the Right by forcing more people into poor DC schemes if we are not careful). There must be space in the middle?

NAPF and stock-lending

I'm think this headline - NAPF chairman urges schemes to restart stock lending programmes - might oversell what the NAPF chair actually had to say, which was:

"Don't abandon your securities lending programs. Having stock to lend and borrow is crucial for efficient markets."

But still I find the pro-stock-lending stance from a trade body meant to represent pension funds - not custodians - a bit odd. For one, arguably he's endorsing a particular strategy - why not tell his members they must do commission recapture? Secondly pension funds also remain split over this issue. In addition shouldn't the membership give the steer to the representative body, not t'other way round?

And what about sentence two - is having stock to lend and borrow "crucial" for efficient markets? Is there evidence that markets without stock-lending are less efficient, and in what sense do we use the term? The existence of stock-lending implies more trading, which means more costs. So that might actually be less efficient - if you think extra trading simply increases frictional costs - from a pension fund point of view, surely?

A bit of a strange perspective all round, especially in light of this.