UK share ownership

There are some very interesting stats out from the ONS today (hat-tip Duncan @ the TUC). It's been a couple of years since the ONS last did their share ownership report, and they appear to have tweaked the methodology. The headline stats for the two largest blocks of UK institutions - pension funds and insurers - are truly surprising:

At the end of 2010, insurance companies held 8.6 per cent and pension funds held 5.1 per cent by value. These are the lowest percentages since the share ownership survey began in 1963.

Yowser. In contrast UK individuals own 11.5%.

The amount held by overseas investors is now at 41.2%, with 56% of that held by North American investor, 28% by European investors, and 11% by Asian investors. In other words, North American investors own significantly more than UK pension funds and insurers combined.

This, to state the obvious, has implications for UK corporate governance. For example, are the attitudes of North American investors different to those of domestic institutions on issues such as exec pay? As I've blogged before, you can already see the impact of US investors in the voting results on certain resolutions at UK companies, but will we start to see a larger influence on other, more central, governance issues in the future.

It also poses a bit of a problem for the FRC in its implementation of the Stewardship Code, since up tp 4 out of 10 shares are held by investors who are unlikely to be FSA registered, and thus not required to even produced a Code statement.

Paying trustees

When I was working with pension fund trustees at the TUC I was always a bit nervous about the idea of paying them. This was long before I got interested in the area of motivation theory, and was instead I think mainly a concern that payment might lead the "wrong" type of trustees to come forward and/or change the approach of those already elected.

As I've read more about motivation research, I would have thought that I would become more hardened in my opposition to paying trustees, but actually I find myself more open to the idea. I'm currently reading Motivation, Agency and Public Policy and it makes the case very well that financial rewards can work to 'crowd in' motivation when we're expecting people to act altruistically. This maybe because they are seen as a symbol of appreciation, rather than an incentive to increase supply...!

I think this may apply with respect to trustees, at least of big schemes. The job they have to do has become much more demanding both in terms of time involved and the intellectual effort required. If you accept Le Grand's argument, there's a threshold that volunteers or public servants need to cross in terms of self-sacrifice in order for it to feel worthwhile (counterintuitively too little sacrifice makes it seem less appealing). But there's also a threshold at which the sacrifice becomes too much. Perhaps the increased workload has pushed many trustees to the edge of the latter threshold, and some form of payment would at least be a recognition that their contribution is valued, and may make them stick at it.

When I think back to times I heard member trustees (who were TU members) arguing that they should be paid, it was generally argued in terms of the amount of work they had to put in. It felt like a request for recognition, rather than a demand for compensation.

Latest Member Trustee News

From the TUC is available here. The annual trustee conference has also been announced, see here.

Pension fund self-interest vs taxes

Chris Dillow has an interesting post up about the Tobin Tax idea, and what the arguments behind it might lead you to think about politics. It got me thinking about what I really think about the proposition. And to be honest, much as I have no sympathy with those 'outraged' by Adair Turner even talking about taxes, I'm not convinced the idea is a great one, at least in my corner of the world. 

Because of my interest in governance/ownership issues I'm thinking about equities here. Share purchases are already subject to stamp duty, yet this hasn't stopped the level of trading gradually increasing and with it the costs for those on whose behalf it is undertaken. And this hasn't gone unnoticed - Warren Buffett talked a few years back about a new law of motion - as motion increases, returns decrease. And as Watson Wyatt put it in its Remapping Our Investment World report that the increase in trading "has enriched the broking community and impoverished the average pension fund".

But would, for example, whacking up stamp duty shares even further actually do any good? It would likely only make a difference if the impact was definitely felt, but felt by who? Most funds obviously delegate investment management to fund managers. But fund managers aren't going to shoulder the cost, they will just pass it on to the client. Thus it would ultimately sting pension funds and others, not the intermediaries who are doing the trading. 

Another not entirely rubbish argument is that if increased taxes made trading in equities prohibitive, this might encourage investors to pile more into derivatives, specifically contracts for difference.

Of course there are good arguments against both of these points. The increased cost of trading is the point of course - it's intended to hurt in order to encourage lower levels of trading. And if trading levels fall far enough, pension funds might actually end up better off. And we're talking about the secondary market here really - as the Berle and Means quote below makes clear, this isn't affecting the allocation of capital to businesses. Similarly if you're bothered by a flight to CFDs then presumably these could be taxed too so that they don't become too relatively attractive.  

But I can't help thinking that if this issue is already well-known to investment consultants, for example, that there must be better ways to address it. Why can't funds put turnover limits on their portfolios, or make other changes to mandate design? Or why not focus trustees' attention more directly on investment costs as a key part of their duties? If Watsons are right and fees have gone up 50% in five years you would think that the funds' self-interest ought to kick in, yet it doesn't seem to.

This does make me wonder sometimes about the relative importance of the principal-agent problem in the trustee-fund manager relationship (and the beneficiary-trustee one) versus the fund manager-company one. The principals in the first case have (most of the time) far more power over the agent than in the second case, yet seem to rarely exercise it effectively. And we seem to spend a lot more time focusing on the second one. 

But if we got trustees, for example, thinking more about the costs they are incurring they could work with their agents to reduce them without the need to turn to tax. It seems at present that (as Gillian Tett suggested in the Prospect interview) the real problem is getting the agents to think about their own financial self-interest and act on it.

TUC Member Trustee News

Latest issue is here.

TUC Member Trustee News

The latest issue can be downloaded here.

Tesco AGM - use your vote

A quick plug for the excellent work being done by Unite to combat discrimination against agency workers in the meating packing and supply sector. Unite has been pushing the big supermarket chains to address this issue in the companies that supply them with some success.

Their latest initiative is a shareholder resolution at Tesco's forthcoming AGM which Unite has filed with the West Yorkshire Pension Fund. It seeks to get Tesco to -

Allocate a non-executive board member to Tesco's Corporate Responsibility Committee to share accountability for implementation and achievement of these policy commitments.
Commit to annual reporting publicly on performance and progress on relevant Tesco policies, including formalising specific Key Performance Indicators to measure compliance.
Implement as a manageable model for demonstrating progress, improvements to Tesco's UK meat and poultry supply chain, which has been identified as a particular area of non-compliance with implications for social cohesion. The company should develop a framework, through the auspices of a multi-stakeholder group that includes worker representatives such as the Ethical Trading Initiative, that will:
• ensure Tesco suppliers eliminate discrimination and treat all workers equally regardless of employment status; and
• provide support for UK meat and poultry suppliers to Tesco to ensure they satisfactorily deliver equal treatment and a reasonable ethical norm in this sector.

It's resolution 23 on the AGM agenda, and the meeting is on 3rd July. Most pension funds will hold Tesco because it's such a large company so if you're a trustee this is am opportunity to use your share-ownership to address workplace rights in a company you part own.

At the least you should try and find out how your fund manager(s) intend to vote on the resolution, but better yet why not instruct them to vote for the resolution?

TUC trustee conference

Blimey, is it that time of the year already? A few bits about the TUC's forthcomng annual trustee conf below, more details and registration here.

Tuesday 30 June 2009, Congress House, London

In this time of financial turmoil, what are the prospects for pensions? And what can trustees do to steer pension savings through the storms and invest responsibly for the long-term future? Trustees, trade unions, employers and governments have been wrestling with these questions as the recession hits company balance sheets and investments.

This conference aims to provide trustees with informed commentary from leaders in the pensions and investment fields. It is an important opportunity to find out about and debate the latest developments in pensions policy, regulation and investment.

The conference will be chaired by Kay Carberry, TUC Assistant General Secretary, and the high-profile programme of speakers includes:

Rosie Winterton MP, Minister for Pensions and the Ageing Society

Brendan Barber, TUC General Secretary

Jeannie Drake, Acting Chair of the Personal Accounts Delivery Authority

David Norgrove, Chair of the Pensions Regulator

Nigel Peaple, Director of Policy at the NAPF

Gillian Tett, Capital Markets Editor, Financial Times

Colin Melvin, Chief Executive of Hermes Equity Ownership Services

John Evans, General Secretary of TUAC; the Trade Union Advisory Committee to the OECD

The conference is also a valuable opportunity to meet fellow trustees, trade unionists and pensions and investment experts to exchange information and experience. A series of tailored workshops will allow delegates to get into more depth on some of the issues, and the drinks reception at the end of the day is a great chance to meet fellow delegates and share thoughts over a glass of wine.

TUC trustee seminar on responsible investment

Full details here.

Responsible Investment Trustee Training Day
10am-4pm, Monday 26 January, 2009

Responsible investment has grown hugely in profile and impact, not least with the global success of the United Nations Principles for Responsible Investment (PRI). The need for active ownership and scrutiny of companies has been powerfully underlined by 2008's financial turmoil and the losses sustained by pension funds.

Donald MacDonald, member nominated trustee at BT pension fund and chair of the PRI, has said: 'The increasing support for responsible investment shows that investors have taken a long hard look at the credit crunch, and some of the practices that caused it, and decided they can benefit from more comprehensive analysis of investment risk, one which incorporates environmental, social and corporate governance issues into decision making and ownership practices.'

This pilot trustee training on responsible investment will cover:

? what responsible investing is and is not - eliminating myths

? why responsible investment is integral to meeting fiduciary duty to members

? how to ensure your fund managers focus on members' long-term interests

? linking with trustees of other funds to ensure effective engagement with companies

? practical steps to make progress, including building support for responsible investment on your own trustee board.

This training is for trustees who want to better understand and take forward responsible investing for the benefit of fund members, and are looking for practical support in doing so.

The training is free for members of the TUC's trustee network. It will be delivered by Catherine Howarth (Executive Director of FairPensions and an MNT at The Pensions Trust), Bernie Doeser (a non-exec Director of FairPensions and former Shell Pension Fund trustee), David Pitt-Watson (former Chair of Hermes Equity Ownership Services and author of The New Capitalists) and James Gifford (Executive Director of the United Nations Principles for Responsible Investment).

The training will take place at Congress House, Great Russell Street, London, WC1B 3LS.

TUC Member Trustee News

The TUC's regular newsletter for pension fund trustees is available to download as a PDF here.

This issue's contents: Conference report - taking the long view, Fourth international union trustee meeting, Core of fund managers still keep votes secret, Myners advisory group must not be industry talking shop, Pension centenary, Research shows progress towards more MNTs', Pensions Bill and Personal Accounts update, TUC calls for full review of buyouts model to safeguard members' interests, Growing interest in promotion of corporate standards.

TUC report on member trustee representation

Blatant steal from the TUC about the shift to equal member representation on pension fund trustee boards.

Member involvement on pension scheme boards continues to grow
New TUC research reveals today (Monday) that 86 per cent of pension scheme boards now have one-third of their trustees nominated by members and many are moving towards 50 per cent representation.

The TUC research - The member voice in pensions governance - shows that six months after the requirement for boards to have one-third of trustees nominated by pension scheme members came into effect, 86 per cent of boards are already complying with the regulation.

The TUC believes these findings show that industry scepticism towards pension schemes recruiting enough member nominated trustees (MNTs) is misplaced. In fact, several schemes have commented that they found it easier to recruit MNTs than employer nominated trustees (ENTs).

The research also shows that 24 per cent of pension schemes have gone beyond the minimum requirement and have at least 50 per cent member nominated representation. Despite claims in some industry quarters that pension schemes and employers are overwhelmingly hostile to a 50 per cent requirement for MNTs, the TUC research found that only 30 per cent disagreed or strongly disagreed with the target.

In order to maintain the growth member involvement on pension scheme boards, the TUC report calls for the Government to implement its manifesto commitment and move towards requiring 50 per cent membership.

The TUC believes it is important for members' voices to be heard in the running of their pensions. MNTs can bring the views, experiences and interests of members to the governance of their pensions, who are the ultimate owners of the investments held in their pension scheme.

Member involvement is also essential to protect schemes from any unscrupulous employers who may act without members' best interests at heart. During the TUC research, a number of respondents made specific reference to the Robert Maxwell scandal.

TUC General Secretary Brendan Barber said: 'It's absolutely vital that members' voices are heard in decisions about the governing of their pensions, particularly in times of economic uncertainty.

'The growing number of member nominated trustees on pension schemes is therefore great news for the millions of people who rely on them to govern their retirement income responsibly.

'These findings shatter scepticism from some industry quarters about recruiting member nominated trustees. In fact, one in four pension schemes are going beyond the legal minimum with at least 50 per cent member representation.

'In order to continue this progress, the Government must implement its manifesto pledge and require all schemes to have 50 per cent member nominated representation.'

The research also shows a disappointing lack of diversity among pension trustees, with boards still dominated by white men over 45. Just 11 per cent of trustees in the schemes surveyed were female, less than one per cent were from a black and minority ethnic background and less than one per cent were under the age of 35.

While many of the trustees in the TUC research are based in male dominated workplaces, such as manufacturing, the research still shows that trustee boards are struggling to reflect the diversity of their workplaces.

Update: Doh! should have read this properly, most schemes have met the 1/3rd requirement, not 50/50. Headline changed...

TUC trustee conference docs, reports etc

John Gray has already blogged about the recent TUC trustee conference here and here, so I'm not going to bother.

However you can get a copy of Brendan's speech to the conference here, and you can download the breakout session presentations here.

TUC Member Trustee News

A quick plug for the latest issue of Member Trustee News which you can download as a PDF here. It's been given a redesign and now comes with at least 25% more snazz.

Contents include: TUC trustee conference 2008, Treasury to update Myners Principles , DWP sets out new work on risk-sharing, Pensions and private equity Accounting Standards Board (ASB) discussion paper issued, Progress to 1/3 MNTs and beyond: TUC research project, Investors launch climate change adaptation project, Diversity and Pension Trusteeship - research project, Guidance and consultations published by the Regulator

TUC trustee conference - 27th June

Blimey it's that time of year already - the TUC's annual conference for trustees is coming up on 27th June. This year's speakers include James Purnell, the Beeb's Robert Peston, and Brendan Barber. PDF flyer here, blurb below:

Taking the long view - Effective pension trusteeship in uncertain times
TUC Member Trustee Network annual conference - Friday 27 June 2008, Congress House, London

The conference will be followed by a drinks reception

Global economic turbulence, increasing regulatory and legal burdens, greater longevity and legislative change: these are uncertain times in the pensions world. The role of member trustees is critical in stewarding pensions, protecting members' benefits and taking a long-term view in the face of these challenges.

This conference aims to help trustees to navigate the current terrain and look to the future on pensions policy, regulatory and investment issues.

Keynote addresses from James Purnell, Secretary of State for Work and Pensions; Robert Peston, BBC Business Editor; and Brendan Barber, TUC General Secretary, will look at the UK and global context.

Workshop sessions will provide an opportunity for more detailed discussion of key issues, including scheme funding, DC governance, responsible investment and alternative investment strategies.

The conference is also a valuable networking opportunity to meet fellow trustees, trade unionists and pensions experts to share knowledge and experience.

Pension trustees fear private equity takeover

This survey from Aon Consulting is interesting for two reasons. First, it is clear that trustees believe that being taken over by private equity can have a negative impact both on the treatment of the scheme and its members and the overall strength of the business:

Nearly three quarters of pension trustees (72 per cent) would be concerned if their scheme’s sponsoring employer were to be taken over by a private equity firm, according to new research released today by Aon Consulting, a leading pension, benefits and HR consulting firm.

Aon Consulting surveyed over 250 trustees of Defined Benefit (DB) schemes on how they felt about the prospect of a takeover by a private equity private equity firm, as well as whether they would consider PE as an investment opportunity.

Results showed that the prospect of being bought by a private equity firm raised fears with nearly three quarters (72 per cent) of trustees. This figure rose to almost 80 per cent of responses when the results were narrowed to trustees of schemes with a value in excess of £100million.

The main reasons given for such concern related to short-term funding concerns (around 30 per cent), followed by worries about a deterioration in the strength of the covenant (around 20 per cent) and concerns about potential lack of interest in the scheme’s members (20 per cent). Trustees were also concerned simply by a fear of the unknown (15 per cent).

But secondly it also demonstrates the way that trustees also apparently fail to make the links between their own investments in the asset class and the negative effects it can have:

However, in contrast to trustees’ wariness of private equity acquisition, their attitude shifts positively when it comes to investing in privately owned companies as a means of diversification. Around a fifth (21 per cent) of trustees said that they have considered and implemented, or are currently considering, investment in PE. For schemes with a value over £100 million, where almost a third (31 per cent) say they are considering, or have already invested in PE.

TUC Member Trustee News

A quick plug for the latest issue of the TUC's newsletter for pension fund trustees which can be downloaded here. This issue includes information on the Pensions Bill, responsible investment and corporate responsibility, Trustee Awards, pension buyouts and an update on the Pensions Champions project. It also contains an article about why trustees should review their investments in companies operating in Burma.

Unison trustees to raise Burma issue

From the Unison capital stewardship site:

Your pension fund can help the Burmese people

Do you contribute to your employer's pension fund? If you do then you will be able to take part in a global campaign to help the Burmese people achieve democracy.

Your pension fund may have shares in companies that trade with the military dictatorship. The Burmese trade unions want you to tell your fund trustees or reps to stop investing in companies that trade with Burma.

UNISON is supporting a call for trade union members across the world to get involved.

And this is how you can do it.

Write or send an email to your pension fund administrator - go to your employer's web site to find out who this is or ask your UNISON branch if they know.

You should ask your pension fund board of trustees or pension committee to request that they or your investment managers report to you on:

• what shares the fund holds in companies with ties to Burma

• their assessment of the financial, legal and political risks this may pose to your savings and the reputation of the fund

• their strategy for addressing such risks

Remember, your pension fund is your savings. You have a right to know how this money is invested, and a right to ask if investing in companies that make money from a military dictatorship is putting your savings at risk.

Since 2000, the international trade union movement has called on all companies with business links in Burma to sever those links and withdraw from the country.

In October 2007, the International Trade Union Confederation asked its affiliated organisations to engage in a shareholders' campaign which may include disinvestment from companies linked with Burma.

This position supports that of Burma's democratically-elected ruler, Aung San Suu Kyi, as well as the Federation of Trade Unions-Burma, which operates clandestinely inside and outside the country.

Foreign companies play a pivotal role in maintaining a steady flow of capital to the military dictatorship, and by extension, in upholding the country's brutal regime.

Military rule and repression has led to massive and systematic violations of human and workers' rights. In particular, the military regime oppresses and exploits its population through the widespread use of forced and compulsory labour.

For more information on UNISON's capital stewardship programme, go to unison.org.uk/capital or email Colin Meech on c.meech@unison.co.uk

Trustee decision making

This is an oldie from 2005 but I think worthy of a plug. It's a bit of research done by the cademic Gordon Clark into the way that trustee makes decisions. It looks at things like their attitude to risk (both personal, and as a trustee), discount rates they apply, how susceptible they are to confirmation bias and so on. So, as you've no doubt guessed, it has a strong behavioural economics element to it.

Here's a good bit from the introduction about rationality:

Within Western philosophy, substantive rationality is given pride of place and is commonly defined as the capacity to draw logically correct conclusions from a given set of premises (ie. reasoning by deduction). In the social science disciplines that privilege theory over empirical evidence, there is a high premium attributed to deducing the logical implications of a set of propositions thought to characterise economic and social processes. For example, if "All people maximise utility" and "Pension fund trustees are people" then "Pension fund trustees maximise utility". By implication, if "Pension fund trustees are responsible for investment strategy" and "Venture capital investments produce higher rates of return" it follows that "It would be irrational not to invest in such opportunities".

Three objections can be made to the status attributed to substantive rationality. First, even if we agree that rationality is a natural trait of human beings it is unlikely that human beings are equally endowed with the ability to exercise rationality in practice. Just as some people can run faster, some people can jump higher, and some people can swim further, we should expect performance in logical reasoning to vary a great deal amongst human beings. Second, logical reasoning may give rise to false conclusions. In the real world, it matters both whether the underlying premises are correct and whether the reasoning process is valid. Third, substantive reasoning may be vulnerable to systematic anomalies. Thus, those that study the psychology of reasoning have been very concerned with how and why people are seduced by "plausible, but fallacious conclusions" (Wason and Johnson-Laird 1972). Moreover, it appears that many people whatever their socio-demographic status and educational qualifications are risk-averse (Kahneman and Tversky 1979).

When the report came out I was a bit worried by it as I thought it might add to pressure to 'professionalise' trusteeship with a big P. I have two problems with this. First, whilst professional trustees are often a useful addition to a board I don't think they can ever have the same member-focused instincts that MNTs do. And secondly, I think everyone employs flawed decision-making - as the research suggests. So the danger is that we would end up paying for trustees who are less worried about scheme members, and just as bad at judgment calls.

Anyway, with a bit of distance (and trustee bashing having died down in the UK) I now think the report is simply a useful bit of research. You can download it here.

Who is fighting your corner?

For marketing purposes I thought I'd try and give this post a better title than my original idea - 'Principals and agents in investment management' - but the original one is what I'm really going to cover. This is something I've been thinking about quite a bit lately and I was prompted to write about it after a financial journo mate of mine recently sent me a really interesting report. It is from Watson Wyatt's investment consulting practice and is entitled "Sales, stewardship and agency issues - Improving the alignment of principals and agents".

The report begins by explaining agency problems - broadly the point that the service providers (agents) that we (principals) appoint don't always act in our best interests. It goes on to question why pension funds have apparently put so little pressure on fund managers to shift away from fees which are a % of assets under management to those based on performance. It points out that the former financially incentivise the fund manager to win more business, rather than actually generate a return (although returns obviously also grow the assets) and mean that they can pick up money for simply rising with the market.

It argues that one reason for this might be found in the relative bargaining power of principal and agent (and bear this in mind for later on):

"The game theory branch of economics can shed some light on the situation. Game theory is essentially the study of bargaining processes – when there is a cake to divide, do people get their fair share, or do some walk away with more than they should? Simplistically it comes down to relative power, or ‘threat power’, with the implication being that the investment agent holds more power than the principal (having gone through a process to find the very best manager, why threaten a fledgling relationship with hard fee negotiations, especially when the prospective
outperformance makes the process look like penny-pinching)."

What is more, Watsons point out, pension funds don't employ only one group of agents. In addition to fund managers they hire consultants, custodians, legal advisers, performance measurers and so on. And some of these agents have their own agents - fund managers employ brokers for example. Finally they argue that we can even see trustees as agents - of the beneficiaries primarily.

With this is mind the report argues that trustees need to focus their attention on the agents that are least 'client-centred'. They provide the results of a survey of fund managers who were asked to rank agents in order of client-centredness. The results, in descending order, were - investment consultants, fund managers, fund of funds, hedge funds, investment banks. Two points - first, you wonder whether fund managers feel compelled to rate consultants most highly because of their 'gatekeeper' role. Second it's worth pointing out that even consultants didn't do that well. Fund managers were asked to score each group on a scale of 1 to 10 with 1 being highest for client-centredness. Consultants managed about 4.

Funnily enough they see a negative correlation between high margins and client-centredness:

"From observation, we would contend that there is a relationship between client-centredness and the profitability of the agent (with high client-centredness associated with lower margins). There is, therefore, a gravitational pull away from high client-centredness towards higher margins."

It's the next bit that is important. Watsons argues that one way that trustees can overcome the principal-agent problem is through mandate design. They argue, rightly in my view, that traditional mandates don't deal with 'ownership issues':

"The ownership of large quoted companies has become increasingly fragmented. Arguably, it is this that has allowed the ‘egregious’ compensation packages of senior executives, the non-accounting for stock options and other examples of questionable corporate behaviour. Essentially the managers of traditional mandates, whether active or passive, have not exercised sufficient control over the corporate agents (and the fiduciaries have not exercised sufficient control over the investment managers)."

But they go on to suggest that private equity might be part of the answer:

"An alternative mandate design is private equity which restores some of the link between ownership and control. Here, company management are incentivised by ownership stakes and the private equity manager (the ‘general partner’ (GP)) exerts
considerable effort to retain as much control as possible. The principals (limited partners (LPs)) should benefit accordingly."

This is one area where I think Watsons actually get it a bit wrong. If you follow the logic they develop in the paper, and take account of what actually happens in the real world, I think you can only come to the conclusion that pension funds are actually more disenfranchised when they invest in private equity.

I base this assertion primarily on the attitudes of people from the PE industry themselves. In discussions with a number of them I have found they are frequently very dismissive of potential and actual limited partners (LPs). These days it would be unthinkable for a mainstream fund manager to be so openly critical of clients, but general partners (GPs) in PE firms can get away with it. There is no doubt on their part about who has the bargaining power. For example, in an admirably straight explanation of PE of an asset class, industry insider Guy Fraser-Sampson makes the following point about an individual LP's position:

"[T]he LP’s only sanction when faced with what may be deemed an unacceptable situation is not to invest, but invest elsewhere. The fund, if it is a quality fund, will be potentially oversubscribed almost immediately. It therefore matters not one jot to the GP whether the LP invests or not; if that particular LP does not proceed, there are others who will… [A]s long as there are new investors waiting to crowd into a fund if existing ones fail to take up their offered entitlement, then GPS will be able to call the shots… [N]ot only is the situation not going to improve, but if anything it is going to get even worse given the large amounts of extra capital which will be seeking a home in the asset class in future."

(From Private Equity As An Asset Class.)

Isn't this exactly the situation that Watsons describe in the first excerpt?

However the PE point aside in conclusion Watsons do suggest that trustees could consider other types of mandate such as long-termist ones, activist ones and so on. They also suggest trustees monitor the potential principal-agent conflicts.

Finally they also suggest collaborative to increase pension funds' leverage with agents. Here I wholeheartedly agree, and indeed in the shareholder engagement world it is already a standard approach on some issues such as climate change. But surely there is much more scope that is yet to be properly explored. Not least relationships private equity firms, and I'll finish with another extract from Guy Fraser-Sampson's book:

"Perhaps surprisingly, there is little attempt made by LPs to get together and negotiate terms collectively, nor to agree ‘industry standard’ terms amongst themselves and say they will only invest on this basis, although common sense would appear to commend both these courses of action."

If the PE industry is openly wondering why we don't work collectively, surely it is time to give it a try?

TUC Member Trustee News

The latest issue of the TUC's newsletter Member Trustee News has just been produced. Contents list - Member trustee network conference, Personal accounts update, Deregulatory review, New TUC contacts, Pensions Champions, PensionsWatch 2007, Private equity guide. You can download it from the TUC site here.

The TUC has also produced a guide for trustees on private equity which can be downloaded here.