GMB pensions Q and A

A belated plug for the latest communique from GMB Heroine of Pensions (First Class) Naomi...

The nights are drawing in and scary ghouls are wandering the country (well party conference season wasn’t that long ago) so it must be Autumn and time for another Pensions Q&A. The self-same party conferences gave a few rather hefty clues about the plans the major parties (and the Liberal Democrats) have regarding your twilight years. This edition will therefore be dedicated to the view from the top of David Cameron’s mountain from where he looks down on those of us without a multi-million pound nest egg to retire on.

OCCUPATIONAL PENSION SCHEMES

1. Personal Accounts
Personal Accounts are supposed to be the saviour of those workers whose employers don’t provide them with a pension scheme. There is of course rather a danger that Labour’s plan to move all those without an occupational pension into Personal Accounts from 2012 will be reviewed or reformed away by any incoming government but generally the indications are that the mighty brains of the Conservative front bench (and Vince Cable) haven’t come up with anything better so they’re likely to run with this one. As a defined contribution scheme with less than 8% of earnings being invested, Personal Accounts are not going to provide for a luxurious retirement on the Costa del Pension but it’s better than nothing, which seemingly is the alternative.

That, I’m afraid is the end of the good news – yep, you blinked, you missed it.

2. Closing the MPs’ Pension Scheme to New Entrants
Now I know this might not give rise to oceans of sympathy for all those new MPs desperate to get their hands on an expenses form but it’s a very bad sign. If an ever increasing number of MPs don’t have a good quality, defined benefit pension scheme to join, how bothered do you think they’ll be about the rest of us having one? Don’t get me wrong, a 1/40th accrual fully indexed final salary pension is rather generous these days but moving from that extreme to the other of bargain basement defined contribution scheme isn’t going to help anyone.

3. Capping Taxpayer Funded Public Sector Pensions at £50,000 because Tax Relief on Private Sector Pensions is Capped
I’ve taken this directly from George Osborne’s speech as I’m afraid despite his rather expensive education this policy statement (and that’s what we’ve been led to believe this is) makes about as much sense to me as an Ikea instruction guide in the original Swedish. Firstly to strip away the complete piffle – the tax relief regime applying to private sector pensions is exactly the same as that applying to public sector pensions, so the stated reason for this proposal is flawed at the outset. Secondly to question the profoundly unclear – what is a taxpayer funded public sector pension? No public sector scheme is funded exclusively by the taxpayer (except technically the armed forces scheme but we’ll leave that to one side). Employees contribute for one thing and in local government 27% of the scheme’s income comes from investments. Despite this, Ozzy wants to cap pension benefits at £50,000 a year. Again to most this sounds like a faraway figure that won’t affect them. Think again. Just like closing the MPs scheme, this is the thin end of a very bleak wedge. If NHS consultants (medical not management), head-teachers and local authority chief executives don’t benefit from having a good quality pension scheme, why would they support the continuation of these schemes for nurses, social workers and teaching assistants?

Above all, remember Cameron’s words in 2008 – “My vision is to move increasingly towards defined contribution schemes rather than final salary schemes.” If that’s his view from the summit, I think we’d better all batten down the hatches at base camp.

STATE PENSIONS

Before you sit there thinking, ‘oh well it’s ok, the Tories are now the party of the poor I’ll be able to rely on the state pension’ - a couple of flies in that particular ointment. Firstly announcing a raft of policies that are going to create rather than reduce poverty hardly inspires confidence. Secondly, another of Ozzy’s great ideas is to increase the state pension age to 66 ten years earlier than is currently planned. We already know that radically different life expectancies between rich and poor make this a seriously regressive way of saving the public purse a few pennies so how this fits in with the new fluffy Tory image I’m not sure. As for the £13bn a year the Tories claim this would save, that figure is disputed by practically everybody with access to a calculator.

To end on a happy note, all political parties are committed to restoring the earnings link to the basic state pension. Obviously this decision is made somewhat easier since the inflation underpin that Labour introduced means that in April 2010 the state pension will rise by 2.5% (to £97.65 a week) while average earnings stands at about 1.6%.

So there you have it, more amazing news and analysis on the pension page of GMB’s website: www.gmb.org.uk/pensions

If you want a vision of the future...

Right, now I've got the attention of George Orwell fans... I've been thinking a bit lately about what direction corporate governance and shareholder engagement is likely to take in the future. I think there are some obvious trends already emerging, along with the re-emergence of older ideas, and a few potential opportunities that don't (yet) seem to have been developed. Bear in mind I'm cutting a few corners and making some big assumptions in all this, and basing my comments purely on the UK, but here you go...

First up, I think that arguably more damage has been done in this crisis to the reputation of institutional shareholders as owners than to the UK's corporate governance regime. Think about it, no-one is seriously arguing that we move away from 'comply or explain' (even though others are), and you can find plenty of statements from companies, investors and others in responses to Walker, the FRC etc boldly stating that the UK's governance is not broken.

In marked contrast there seems to be a fairly solid consensus that institutional shareholders collectively have not covered themselves in glory (and by extension that something needs to change as a result). The reasons given for this vary - shareholders aren't really interested, they are inherently conflicted, clients don't ask them to do it, when they do engage it's at a superficial 'box-ticking' level, the information asymmetry undermines effective engagement, etc - and as a result the point behind the various critiques is often quite different. But a consensus there does seem to be, which is why the outgoing NAPF chair (to my surprise) actually seems to have hit entirely the wrong note, even according the Association's members.

Notably therefore we are very likely to see some sort of formal code for investors themselves to sign up to or explain why not. It also seems very likely that this will fall under the remit of the FRC rather than the ISC (a body which itself has suffered potentially fatal reputational damage as a result of Paul Myners' trenchant criticisms of it). Depending on what finally comes out of the Walker Review there may even be a small role for the FSA here, something which has the fund managers hopping mad.

But, second point, how likely is this process to lead to a change in the level and nature of engagement? This year there has been an uptick in voting - a fairly basic yardstick for measuring activism admittedly, but a vital one IMO - but it has not ben a fundamental shift. I suspect you'll struggle to find an RBS investor who backed the bank's remuneration report, for example. But actually go back just one year - and the annual report which made crystal clear that enhanced pensions were available to directors - and the remuneration report sailed through. In addition, there are fund managers out there who are still voting in favour of god-awful remuneration policies, just not the headline-grabbing ones. Therefore next season will actually tell us a lot more than this about how much things have changed. I have a suspicion that there is a substantial element of, for want of a better word, marketing in some institutions' voting this year.

Which leads on to point three - if we don't see a step-change on the part of institutional shareholders then what happens? In terms of high politics it won't necessarily matter because the Tories will be in power and their policy interest in this area is not obvious. A few examples - the Tories slagged off the FSA remuneration code when it appeared, but didn't talk the FSA about it during the consultation period. They don't seem to have put anything in to the Walker Review or commented on the FRC review of the Code. And their own 'White Paper' on financial reform had I think one or two paragraphs in it on corporate governance, and that said 'we don't know what we think yet'. So I suspect politically savvy fund managers are thinking they only need to make it until May and all this governance stuff will calm down again. (Incidentally, I suspect a change of government is going to be something of a rude awakening for those progressive types in this bit of the world who seem to think there is no real difference between the parties.)

But in public policy generally in this area, a return to pre-crisis behaviour by institutional shareholders could do a lot of damage. As I've banged on regularly in the past, if the owners - for whatever reason - repeatedly show no inclination to act like economic theory would suggest they ought, then people will question a shareholder-focused governance regime. If companies and their investors wish to avoid a situation where there is a greater statutory element to governance they need to recognise this. In a sense then Paul Myners is really giving institutions an opportunity to make the system work on a market basis. Again, I've said this before, but I think fund managers arguing against being encouraged to play the ownership role risk a lot as a result, though I'm not clear that they recognise this.

Which leads me on to point four - what might emerge instead? Well actually re-emerge - a stakeholder approach to governance. And funnily enough this is something that I don't really know much about, as I've always worked within the shareholder-focused governance framework. But it strikes me that if institutional shareholders effectively formally abdicate as owners in a meaningful sense, then other ideas about who is involved in governance come back into play. (And if you go back to Berle and Means they end up asking these sorts of questions - ie in whose interest should the corporation be run - which is part of their legacy that often seems to get forgotten.) For my part I would - no surprise here! - favour some sort of employee involvement. Not only for the Blairist reason that actually employees have a pretty good claim on the company compared to shareholders, but also because I think it could help discourage group think (see the Cass Sunstein point), and because I think it's right in principle.

Obviously this is a battle that is yet to even be fought, and there is no inevitability either about this happening, or that it would be successful. But it does strike me that the policy positioning the fund management industry seems to be adopting makes such a development more likely. Incidentally I'm genuinely not clear whether the position the industry is adopting is well thought out and aware of the possible impact on the governance debate, or simply short-termist arse-covering. Either way though possibilities are opening up.

There are two further potential trends that may emerge from this. First, those institutional investors which do have an interest in social, environmental and governance (ESG) issues may well start thinking much more about other ways to make an impact. If acting like an owner in the public equity market seems ineffective (because too few others will join you and you can't do it alone) I think they will a) start looking at influencing public policy directly and b) start looking at other asset classes (and the UNPRI is already doing a lot around private equity). Second, it's possible that civil society interest in using 'ownership', which has only recently started to emerge in some places, tails off again. Speaking personally, having been involved in shareholder campaigns that were not supported by one or two large asset managers that make a lot of noise about ESG issues has raised some big questions. I can't believe I am alone in this.

This leads on to point five - remuneration. First up a bit of politics. I'm not convinced by the Compass High Pay Commission, but I do think there is an open goal facing them - the failure of shareholders to police executive pay effectively, or link it too performance. I think if they just drew on some of the data already out there they could make a strong case that the current system is not working. Now that could lead you to try and make it work - and that might require a proper focus on how how shareholders look at pay (my next point) - or you could argue that it's inherently flawed, and therefore we need a rethink. I tend to the former because I think shareholders could make a difference, but you can see how a case can be made for latter. But curiously no-one on the Left has really taken a good look at the operation of the existing system (ie how shareholders act) other than just pointing at the outcomes (continual increases in exec pay).

So, point six. It strikes me that there is an opportunity to have a much more interesting debate about pay, and that shareholders are in a position to start this if they choose to. They could be asking questions like is executive pay working for shareholders, does remuneration act as a motivator, is a reasonable proportion being spent on remuneration (investment banks the obvious ones to look at here), and what about the split between execs and other employees in the same businesses? This ought really be simple self-interest. If shareholders aren't convinced that they are getting the return on their investment in remuneration, why don't they do something about it? And this is an area where some think shareholders can contribute something useful.

Point seven - this could also be a way to start thinking about whether stuff from behavioural economics and social psychology can be applied to governance. There seems to be an increasingly strong view that politics can learn something here. It would seem odd if the governance world (where the point is made so often that good structures aren't synonymous with good behaviours) did not do likewise. Again it seems like an opportunity waiting to be exploited if some investors would only show a bit of willing. There are even a few books out there that provide a jumping off point.

And finally - pressure on fees. Surely there must be some sort of backlash from pension funds against the increasing fees they are charged even though they get no better returns as a result. A focus on costs in the investment chain could lead to a) an attempt to reduce the links in the chain b) closer scrutiny of what actually takes place at each stage and c) a re-considering of the merits of long-termism. For whatever reason, pension funds and other institutions appear to be repelled by the idea that they should act like owners because it's a desirable end in its own right. Fair enough. So let's approach from the point of view that it is also costing them money, and an increasing amount. If they still don't bite then we know we have a political problem, rather than a market failure.

Tory bloggers and climate change

An interesting post by Sunder at Next Left. There's a reasobale counterpoint that it doesn't really matter what Tory bloggers think, since it will be Tory MPs and ministers that will decide the line. If you asked Labour bloggers for their opinion on the 50% top rate tax rate I suspect you're get overwhelming support, whereas elected members may well think differently. But it does suggest, along with the Blues' contortions over Europe, that there is more than a little in the charge that the Tories haven't changed as much as Dave and Gideon would like to suggest.

Voting disclosure - nearly there?

I know this is a bit of a hobby horse of mine, but I've been reading through the submissions to the Walker Review looking to see what sort of of responses there have been to the recommendation on voting disclosure. It's recommendation 22, and it reads as follows:

“Voting powers should be exercised, fund managers and other institutional investors should disclose their voting record, and their policies in respect of voting should be described in statements on their websites or in other publicly accessible form.”

Effectively it just restates best practice, since the ISC has already said (just about) that public disclosure is desirable. But the lack of detail in support of this recommendation does seem to leave the door open to making it mandatory, which obviously I support.

Anyway, I had a trawl through the submissions and found that actually of those that comment specifically on this recommendation, a majority are supportive (and a fair few explicitly call for mandatory public disclosure). A handful appear openly hostile - not surprisingly the IMA and AIC are not supportive - with a few more ambivalent (the ABI and L&G suggest it's a waste of time). So the debate seems to have shifted failry decisively in favour of public disclosure.

A final point. I think we do need to tackle this 'no-one is interested in the data' argument head on. In my opinion, as one of the handful of voting data geeks out there, the amount of legwork involved for an ordinary punter to find out anything useful is the problem. Voting data can be hard to locate - it isn't always where even someone like me would expect to find it.

The format it is disclosed in can also make it very difficult to understand - I've just been looking at one manager's disclosure and it doesn't even tell you what the resolutions are, so unless you have the AGM agenda to hand all you know is that they voted against 'resolution 10' and for the rest. Not exactly illuminating.

And, most importantly, if you really want to take an informed view you need to compared your manager's voting against the rest of the industry. In other words you need to repeat the search for data perhaps dozens of times. Only a handful of sad people are going to bother :-)

If we make disclosure mandatory, and define the format of disclosure, it will be much easier to carry out comparative analysis. Someone geeky like me can go and get all the data and bung it in a survey for you. Or put it on a website, a sort of Confused.com for voting.

At the moment voting data is disclosed in a way that suits asset managers, rather than the punters, and it requires a large amount of effort to make sense of it. But if we make it easier for people to interpret the data I'm confident the interest will grow.

Dissing Shiller, etc

I've mentioned Paul Marsh's 1990 report on short-termism a couple of times. It is definitely worth a read as, even if you disagree with some of the conclusions, it's actually a much more meticulous assessment of the arguments than many more recent short-termism reports.

It's interesting to note in passing that Robert Shiller gets a bit of a slap. This was pre-Irrational Exuberance, when he was more interested in volatility, though with hindsight you can understand why he ended up where he did. Anyway, here's Marsh's put-down:

[S]ome researchers have moved away from a fcous on trading rules, and instead have devised tests for "excessive volitility". The best-known work here is by Shiller (1981) who claimed that stock market prices were far more volatile than could be justified by the much lower volatility of dividends. Subsequent researchers, notably Marsh and Merton (1986), have shown that Shiller's analysis is fundamentally flawed, since it ignores what we know about the way that managers decide on dividends, namely that they try to "smooth" them out over time.

I think that's fighting talk!

Separately, I thought I would flag up a bit I disagree with, which is this:

Faced with the demand for better short-term performance, the fund manager... cannot sell the future short. The only way he or she can outperform is to identify undervalued shares and buy them, and/or overvalued shares and sell them. This, however, can be achieved only through careful investment analysis of a company's short and longer-term prospects - something widely held to be a good thing.

I don't disagree that this is what ought to happen, rather I think that in certain circumstances short-term pressures may lead to "careful investment analysis" getting skewed to result in the picking of stocks that seem to be heading up regardless - see the TMT bubble.

Notably Marsh's report, which - as should be obvious - I like, was commissioned by IFMA (the old name for fund management industry's trade body). Post the TMT bubble EAMA (the European equivalent) commissioned a series of essays on what just happened. Compare and contrast this excerpt from one of the pieces in it:

When Vodafone acquired Mannesman, many investment managers took the view that it made sense to increase their holding even though they believed the shares to be expensive and likely, eventually, to fall in value. The same managers became ever more likely to invest in TMT stocks the more expensive they became. Why? Because to be underweight in these investments without the certainty of being proved right, created significant business risks if the impact on short-term relative performance was serious and if the Principal took a dim view of the way his funds were being managed. Failing conventionally when managing a portfolio can sometimes lead to an acceptable outcome for an investment manager’s business.

If you're interested the piece is by Chris Cheetham, former chief investment officer at Axa, now at HSBC I think. The collection of essays is called Boom and Bust: The equity market crisis - lessons for asset managers and their clients.

The BNP bubble

Staying on the BNP issue for one more post, I really do question the argument that has it that the rise of the far Right is a reflection of the failure of mainstream parties to address legitimate concerns. If that were the case then presumably the problem in the 30s was that mainstream parties weren't addressing legitimate concerns about the Judeo-Bolshevik threat.

Personally I think that some of the concerns that lie behind the growth of the BNP are similarly bollox. Therefore the last thing that mainstream parties ought to be doing is legitiming concerns that may not have much basis in fact (ie the threat of Islamification, immigrants getting priority for council housing etc). The problem is, of course, that even when politicians do hold the line against misconceptions, these concerns persist, and there is always someone on hand to keep stoking the fire.

Flipping forward, the more people that start to accept the BNP view of immigration, the more likely they are to end up talking to others that share their view. And, if we accept Cass Sunstein's argument, this is likely to lead to reinforcement and a tendency to even more extreme positions.

To me it looks like the political equivalent of a speculative bubble. And unfortunately I suspect our ability to detect and try and deflate bubbles is likely to be as successful in politics as it is in economics. At some point the bubble will burst, and those caught up in the mania will look back on it with regret, but at the moment to many in the midst of it it must seem like it must be well-founded because look at all the others who agree.

Obligatory Question Time post

Generally thought Nick Griffin came across badly, but the fact that almost the whole programme was devoted to the BNP, and given the relentless attacks on him, it felt hugely one-sided and unfortunately rather self-righteous. It's was a bit like a chance queue up to throw rotten fruit at the Nazi in the stocks.

Griffin made some bad howlers - why not simply state 'I accept that the Holocaust happened' and distance himself from the KKK? Those and the rant late on about the far-left BBC must have made him come across as a bit of nutter to genuinely unaligned people. Unfortunately I suspect he will learn from this and trim his sails for his inevitable next appearance. Perhaps 'exposing' the BNP to debate will simply make them craft their message even more carefully?

As for the UAF demo, whilst I'm glad there was a demo, I think it was stupid to try and break into the studio, and the people shown on telly getting literally dragged out of Television Centre looked ridiculous. However I have no idea what Iain Dale is on about claiming that they used 'fascist' tactics because there was a vaguely threatening chant. a) It's a (rubbish) chant used on about every anti-fascist demo I've ever been on b) it's usually initiated by a perpetually outraged teenage Swuppie who is extremely unlikely to put it into practice c) I can't believe that a West Ham supporter hasn't heard much worse than this ;-) To argue that an aggressive chant on a demo is 'fascist tactics' is to further devalue a word that has already lost much of its meaning.