Wednesday 26 September 2007

SEC lobby on proxy access

A plug for the lobby of the Securities and Exchange Commission in the US. The SEC's proposals on proxy access could actually mark a step backwards if allowed to stand.

On July 27, the U.S. Securities Exchange Commission (SEC) issued a request for comments on a document that includes rules that would severely roll back shareholder rights in the U.S. in two respects: 1. the ability of a shareholder to use the proxy statement to nominate a director ("proxy access"); and 2. threaten the right of shareholders to file resolutions.

1. The SEC proposals would create cumbersome and unworkable procedures for investors to influence the process of company board elections, otherwise known in the U.S. as "proxy access". The SEC proposal denies shareholders the right to submit resolutions urging companies to adopt procedures to include shareholder-nominated director candidates in their proxy solicitations. This represents a roll-back from shareholder rights recently gained under U.S. case law.

2. The SEC is also examining possible changes to the way that non-binding shareholder proposals are dealt with at U.S. companies. Shareholders could be required to hold a significantly larger stake in a company in order to make a shareholder proposal (e.g. a 5% threshold). This would leave shareholders scrambling to put together coalitions in order to continue to engage U.S. companies. Another suggested change would allow companies be able to "opt-out" of the shareholder resolution process entirely, either by a vote of the shareholders or by a simple vote of the board of directors.

For international institutional investors, a key priority will be to send the SEC a strong signal that the right to file non-binding proposals must be preserved as is (issue #2). There is an initiative underway to coordinate international responses to the SEC though the Clearinghouse of the Principles for Responsible Investment (PRI) for PRI signatories. Details and additional resources can be found below and attached.

Given the importance of the proposed changes under consideration, international institutional investors and other advocates of shareholder rights are being encouraged to send the SEC a written submission prior to the October 2 deadline. Your support in this regard would be greatly appreciated.

Additional Resources

1. PRI Clearinghouse: coordination of international responses to the SEC on the right to file shareholder resolutions. through the PRI Clearinghouse. PRI Clearinghouse posting by Domini Investments (USA) enclosed (pdf), as is draft PRI signatory letter (doc)

2. Background materials prepared by AFL-CIO. The materials include a template comment letter to the SEC geared towards US investors as well as background materials on both proxy access and shareholder resolutions.

3. Dow Jones Article, "US Activists Launch Online Opposition To SEC Proxy-Access Plans," August 29, 2007 (copied below)

4. SIF and ICCR website:

5. SEC Proposals

* SEC proposals - comments received to date:

* SEC Proposals: Shareholder Proposals Relating to the Election of Directors (34-56161)-

Shareholder Proposals (34-56160) -

* SEC Proposals comment submission page:

Tuesday 25 September 2007

More on The Halo Effect

Just about finished this excellent book, and I have to say it's one of the best finance/business books I have read in long time. Much of it is taken up with trashing the typical "analysis" you find in the business pages and management books. A key element is this idea of the Halo Effect, namely if a company does something right - performance - people often see (or choose to see) success in other areas. So a successful company is accredited with having a great culture, or management, or both. In contrast poor performers are are seen as getting the same things wrong.

In addition, many studies of successful companies look backwards. They find successful companies and ask them, or search the business media, for what the company got right. As such they tend attribute success to certain factors once they know what the performance 'answer' is. Although some studies try to overcome this by also including a sample of less good or poorly-performing companies, they often still draw on the same kind of flawed reporting (business press 'stories', asking managers what they got 'right', etc).

The book also argues that success is temporary. Not only is there the effect of mean regression, but companies are also not operating in a vacuum. Competitors can copy products or practices and thus close the gap. Therefore advice (consulting) that claims to offer management techniques that are surefire winners on some quasi-scientific basis, is basically rubbish. In addition performance is, unfortunately, relative, not absolute. A company can significantly improve, becoming more efficient and profitable, yet still lose ground if its competitors are improving at a faster rate. So a business can fail even when it is doing well.

Perhaps my favourite thing about the book is the emphasis on story-telling in both the business press and management books. Much commentary stresses the roles of key individuals, certain decisions, or elements of a particular business's culture or strategy. Yet these are really little more than narratives with a moral in them (ie focus on your core business). I've always had a gut feeling that business reporting works primarily on this basis, and is therefore fundamentally misleading (if perhaps inspiring to some). I don't think I'll ever be able to read the business pages in the same way now.

Great stuff all round. I suppose the next question is how do we apply it?

Monday 24 September 2007

Burma links

Federation of Trade Unions - Burma

Burma Campaign UK

Burma Campaign UK "dirty list" (companies with links to Burma)

Global Unions Burma list (similar to above)

US pension funds & economic activity

The US public sector pension funds are the giants of the investment world. CalPERS, for example, can have a major influence not just on investee companies, but also on countries. CalPERS took some flak a few years back when it introduced a screening approach to investing in emerging markets. Basically it refused to invest in some countries because of concerns about corporate governance, human rights and so on.

but they can also have a big impact on a local level. Recently CalPERS released a study that looks at it impact on the Californian economy. You can find it here and below is a short excerpt from the announcement of the study:

CalPERS economic impact in 2006 created 124,377 jobs, returned state and local tax revenues of nearly $832 million, and generated employee compensation of $4.9 billion to exceed the payrolls of heavy construction, civil engineering, and motion picture and video production industries.

Overall, CalPERS investments made the pension fund a bigger player in the California economy than machinery manufacturing, oil and gas extraction, and the amusement, gambling and recreation industries.

More than half of the pension fund’s economic impact in 2006 came through private real estate development. About 29 percent was through domestic public equities – activities of public stock companies, and 11 percent in construction-related partnerships.

By region, economic impacts included: Los Angeles, $2.2 billion; San Francisco, $1.6 billion; San Diego, $577.2 million; Inland Empire, $372.3 million; Sacramento, $288.7 million; Central Coast, $89 million; Great Valley, $70.2 million; Northern California non-urban, $46 million; and Central California non-urban, $7.3 million.

Pretty impressive stuff, and it also flags up the fact that North American seems to take the economic impact of its pension funds far more seriously than we do in the UK. Typically commentary from the pensions industry almost seems to make a point of stressing that investments are seeking to do nothing more than generate returns. On one level that is clearly true but it also reeks of the reluctance of the UK to think more creatively about how to use the power of institutional investment.

While I'm on the subject of US pension funds, I also spotted this bit from CalSTRS (the teachers fund in California) about sustainable investing. Again it is the sort of thing that you wouldn't really catch UK pension funds (barring the Environment Agency) doing. It does make you wonder whether we could push public sector funds in the Uk to go a lot further...

Top of the blogs

I've just stumbled across this post on Tory blogger Iain Dale's site. Its a list of the top 100 left of centre blogs in the UK.

A few shout outs are in order, notably John Gray at Number 60, John W at Number 50, TIGMOO at 44, and Trot central Dave's Part at 9.

The most important question is, of course, whether I made it into the list. I did, at 86, just ahead of ex-minister Michael Meacher! So that's almost bottom decile performance which means plenty to do in order to achieve the recognition clearly deserved next year.

PS John W has a look at the list here.

Thursday 20 September 2007

Meryvn King and the halo effect

Another day, another fall in Northern Rock's share price. Now attention is focused on the position of Bank of England governor Mervyn King, and his apparent "u-turn". Only a week ago King was publicly against a bail-out, and indeed the Bank has been steadfast in its refusal on the grounds that it creates moral hazard. But the queues outside Northern Rock changed the reality and King in effect reversed his position. Now the knives are out. Some accuse him of giving into political pressure, others of not acting soon enough. He may struggle to survive.

Funnily enough this coincides with me starting to read the excellent book The Halo Effect by Philip M. Rosenzweig. I would describe it as kind of the management equivalent to Fooled By Randomness by Nassim Nicholas Taleb, it's about how we attribute outcomes to the wrong causes, particularly in retrospect. And bloody hell could it have been written specifically to describe some of the commentry around the Bank's actions.

For example this bit in today's Torygraph business section. First it massively simplifies what has occured - apparently King's u-turn can only be either in response to something nasty we don't know about, or because he was sat on by the Chancellor. Second it does the typical wonky thinking thing of projecting attributes, like so:

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.

A real banker, you see, wouldn't have changed his/her mind. They would already haven known the optimal response in advance. King in contrast is of course an academic who only makes decisions based on textbooks, and then changes his mind, or is forced to. Really, having begun reading The Halo Effect I could almost have written the Torygraph stuff myself. It's not "analysis", it's more like a fable - The Tale Of The Academic Who Couldn't Run A Central Bank In A Crisis.

The really odd thing about all this, if you think about it, is that a real full-on crisis has been averted. When the facts change, I change my mind. No-one was really expecting to see a run on Northern Rock, so the pre-existing approach had to change. Why is altering your approach when the situation changes a bad thing? And as for the accusation that the Bank should have acted quicker, well maybe. But maybe again that's just hindsight bias. We can only see what we think the best decision would have been in retrospect, and even then we can't see all the possibilities that other decisions would have created.

So personally I don't think the Bank has done a bad job.

And on that note here is Anatole Kaletsky's piece in the Times today, which is the counterpoint the Torygraph analysis.

Wednesday 19 September 2007

Northern Crock - do investors really understand companies?

There's a great bit on the FT website recalling some of the rather positive analyst comment in recent months on Northern Rock. It turns out that our highly-paid betters in the City were still churning out good news stories about the bank even as it became clear that the bank was in trouble.

One e-mail, purportedly sent by a trader at Lehman Brothers on Friday morning, urged, “load up on Northern Rock for your children, your mum, your goldfish” – just as the bank was suffering the first of two days of heavy losses.

Not that he was the only one. John-Paul Crutchley of Merrill Lynch issued a bullish note to clients, with a price target of 913p on the stock. It ended the day at 438p, having fallen 201p.

Cazenove said in July that there were “two main issues confronting Northern Rock in the short term: an increased cost of funding due to a spike in three-month Libor, and the possibility of wider spreads being demanded by investors given current market conditions”. But its otherwise commendable prescience was marred by its conclusion: “In the short term we believe the group has sufficient flexibility to meet its funding needs.”

Meanwhile fund manager Baillie Gifford seems to have been the most exposed to the Northern Rock collapse. According to the report from Thomsons below they have now sold out, racking up a £200m loss.

Baillie Gifford sells entire holding in Northern Rock - source

By selling its entire stake the fund manager has suffered a loss of up to 200 mln stg.

LONDON (Thomson IM) - UK fund manager Baillie Gifford has sold its entire stake in troubled UK mortgage lender Northern Rock, sources close to the situation said.

Although the fund manager said it had reduced its 5.98 pct stake to 'under' the 5 pct threshold, a source confirmed earlier press reports that it in fact had sold its entire share capital in the lender, realising its loss of up 200 mln stg.

At 11.19 am Northern Rock shares were down over 8 pct, or 24 pence at 280.

While it is very tempting to have a laugh at the City for their inability to do any better than a day trader, I agree with Mr Gray that the problem is that it isn't "the capitalists" who suffer when they get it wrong. You won't have to look very far to find pension funds that had money in Northern Rock, and as such are looking at big losses on their investment. Another reminder why the workers capital agenda is so important.

Bank deposits vs pension benefits

I hate to say it, but I actually agree with business luvvie Jeff Randall on something. His article in today's Torygraph about Northern Rock seems pretty on the money in general to me. But it's the following point that really rings true:

Better to be a depositor in a troubled bank than a pensioner in a defunct scheme. Despite repeated assurances from Government that their money was safe, pensioners who lost everything when their companies failed have been left twisting in the wind by ministers who insist that taxpayers cannot be expected to bail out victims. Strange, then, that Northern Rock savers, who were never promised complete security, have now been offered precisely that.

Of course his argument comes with the usual health warning that it's not very accurate. First it was the DWP, not "the government" who put out the leaflets suggesting that pension scheme benefits were guaranteed. Second, as usual there is no mention of the incompetence of the company management that led to these cases of failed pension schemes (the companies behind them having become insolvent). And third, far from leaving schemes members "twisting in the wind", the government has set up both the Pension Protection Fund and the Financial Assistance Scheme.

But, and it is now a big but, why is it OK to underwrite the full value of NR customers' savings, but impossible to meet the full cost of funding the pensions of those whose schemes have gone belly up? The former is a much bigger potential cost than the latter.

I spose the two principal arguments are as follows. First, the government set up FAS before there was any notion that there would be a run on a high street bank. At the time applying the principle that they couldn't bail out business mistakes with taxpayers money was sound. Secondly, the guarantee of NR customers' savings may never need to be drawn upon.

However we are living in changed circumstances. The Bank of England and the Government have had to shift their stance because a purist "no moral hazard" approach was failing to keep up with the scale of the problem. Given that is the case it now looks inconsistent that innocent victims of pension scheme collapses don't get a proper settlement too.

We are living in interesting times as they say. The normal rules of play are suspended. Given that the Government is willing to be radical in shoring up the financial system, why not be a bit radical on the tax front. The TUC recently argued for the closure of non domicile tax loopholes, why not use the money from that to help fund full benefits for those whose occupational schemes have gone under?

PS. I've really been too kind to Jeff Randall. Robert Peston's blog for the Beeb is much better reading.

Monday 17 September 2007

Trust vs contract-based DC

There is an interesting bit in today's Pensions Week on the governance of DC schemes. Julian Webb of Tory-supporting fund manager Fidelity argues that contract-based DC is not the second choice option that we think it is. He reports back on Fidelity research into employers' views:

"[O]ver 60% of respondents plumped for contract-based DC provision. With benefits in cost and risk reduction, it is easy to see why. Companies offering their workforce a a contract-based scheme no longer have to run a trustee baord. They can pass investment and administration costs onto employees and effectively relinquish responsibility for the provision of pensions who leave the company..."

These, you understand, are good things. It still amazes me that providers in the UK feel no shame in saying these kinds of things publicly. As the article says, contract-based provision is a way to pass costs onto the punters and stop shouldering any remaining responsbility - ie shaft the workforce. It says a lot about how dominant the provider-employer relationship is in pension provision that this type of article isn't even seen as controversial.

Friday 14 September 2007

Another workers capital blog!

The blogosphere is not exactly teeming with capital stewardship blogs, but I'm not the only one. Check out the Capital Matters blog from the US, linked to the AFL-CIO's pioneering work in this area.

And whilst I'm plugging our US comrades here is a useful AFL-CIO policy statement on hedge funds and private equity.

Thursday 13 September 2007

Unite attacks BAA over final salary scheme closure

Another one bites the dust. According to one report the company has justified the move that it was made in order to "protect itself and its pensioners from stock market volatility and bring certainty to contribution levels."

Here's the Unite release:

Unite condemns cynical BAA closure of pension scheme
12 Sep 2007

The closure of the BAA final salary scheme to new starters from December was roundly condemned today by Unite, the largest union at the airport operator and Britain's largest union.

"Hundreds, if not thousands, of people are going to join BAA, especially as security workers, to be told they will have a different deal on pensions to those they will work alongside," said Brendan Gold, Unite national secretary for civil air transport.

Describing the decision as "callous and cynical" Mr. Gold said Unite, which has over 4,000 members at BAA including the all-important security workers and fire fighters, will be making its view very clear to the company.

He said the £29 million deficit on the pension fund was relatively little as far as the long-term is concerned.

"There is no financial or rational reason for the Spanish-owned BAA to do what they are doing," continued Mr. Gold. "We are seeking an urgent meeting with the directors to tell them exactly what we think. We will consult our shop stewards across the airport operations to discuss how we campaign against this outrageous and wholly unjustifiable decision."

More pots of gold in DC schemes!

Just the other week Tory-supporting fund manager Fidelity told us that you could be missing out on thousands of pounds a year in income if you opted for the default fund in a DC scheme. Clearly we should all be opting for more exciting funds run by.... err....

Now it turns out that we could be even richer, if the DC schemes we are members of were made more efficient by getting our advisers to redesign them a bit. So say.... err... the consultants Hewitts.

Am I too cynical, or do all the 'solutions' to crappy returns from DC schemes lead back to paying service providers more? Clearly the only way to really improve DC schemes is to pay narky bloggers to write more rants about pensions.

Wednesday 12 September 2007

Two quick plugs

First the excellent Corporate Governance website, which is regularly updated with arange range of governance news. Particularly useful if, like me, you are not based in the US but are interested in US market developments.

Secondly, the Centre for Corporate Law and Securities Regulation at the University of Melbourne. Some interesting research on this site including this paper on trade union shareholder activism.

Private equity worse than the mafia

Never let it be said that the trade union movement is shy about ramping up its rhetoric. Yesterday was the private equity debate at Congress in Brighton, and Jack Dromey of Unite got stuck in with some colourful language about the buyout business:

"Private equity makes the Cosa Nostra look like a model of openness and transparency by comparison. "They take our members' jobs, they pile our companies with debt, they fleece all of us by not paying their fair share of tax and then expect us to be grateful. "All the evidence we have seen is that jobs, pay, terms and conditions and pensions are put at risk when these companies come in," he continued.

Congress also backe the following action plan:

Congress calls on the General Council to:

i) continue to support affiliates' campaigns exposing the failings of private equity;

ii) maintain pressure on the UK Government to ensure that PE partners are subject to a fair and progressive tax arrangement;

iii) campaign for the strengthening of information and consultation rights where companies are taken over by private equity, plus the extension of TUPE to cover circumstances where a change in ownership arises through share purchase;

iv) ensure a review of the impact on pensions in terms of transparency of information provided by the PE industry so trustees have sufficient powers to call in the Pensions Regulator when PE firms are planning to invest in their company; and

v) establish a database to monitor the activities of private equity funds in the UK and overseas.

Jeannie Drake appointed to Personal Accounts board

Following the appointmemnt of Paul Myners this is further good news:

Jeannie Drake appointed as PADA non-executive director
by Jonathan Stapleton 12-09-2007
JEANNIE Drake has been appointed as non-executive director of the Personal Accounts Delivery Authority.

Drake – whose appointment will take effect from September 17 – currently serves on the board of the Pension Protection Fund, the Equal Opportunities Commission, and the Employment Appeals Tribunal.

Between 2002 and 2006 Jeannie Drake served on the Pensions Commission.

She also has experience in the private sector and is currently a pension scheme trustee for both O2 and Alliance and Leicester.

Drake has also held a number of trade union posts including deputy general secretary of the National Communication Union and president of the Trades Union Congress.

She has been deputy general secretary of the Communications Workers’ Union since 1995, where she specialises in IT and telecommunications.

The department for work and pensions said the recruitment process
for a chief executive and other appointments to the board is under way.

Tuesday 11 September 2007

OECD report on hedge funds and private equity "activism"

Just a link to this report from the OECD on the activism of the two alternative asset classes that tend to trouble trade unionists and lefties generally the most. Haven't read it yet, wil try and post something on it once I have. It sounds like the OECD is pretty positive about the role of both.

Here's a letter AFL-CIO president John Sweeney on the subject.

And here's the blurb from the OECD on the report:

The OECD Steering Group concluded at its recent meeting that “activist” hedge funds and private equity firms can play a positive role in corporate governance of publicly held companies. The corporate governance practices of private equity firms and hedge funds are best addressed within the framework of the existing OECD Principles of Corporate Governance so that a separate code is not necessary.

Monday 10 September 2007

Tories rowing back from earning link?

Not sure what is going on here, it looks like Michael Gove might have just got his policy wires crossed and said the wrong thing. Hence the immediate rebuttal. But remember he is very close to Cameron. Still seems a bit odd though. Of all the bits of the current pensions "consensus" I thought the restoration of the earnings link was pretty safe, with most fire directed at Personal Accounts.

Pension link commitment questioned
Last Updated: Wednesday, 05 September 2007, 12:36 GMT

The Government has called on the Conservative Party to clarify whether it remained committed to restoring the link between the state pension and earnings.

The move follows comments by shadow schools secretary Michael Grove that restoring the link was no longer a Conservative election commitment.

Work and Pensions Secretary Peter Hain has written to his opposite number Chris Grayling seeking assurances that the Conservatives still supported the cross-party consensus on the new pensions settlement.

He said: "As Secretary of State, I am determined to maintain the political consensus that has been forged on pensions, because I believe it is essential to entrench a new and lasting pensions settlement.

"Until recently, the Conservative frontbench has publicly committed itself to such a consensus, of which restoration of the earnings link is a crucial part.

"In the interests of pensioners, it is essential that you now clarify your position, making clear whether Mr Gove was correct in his remarks and guaranteeing that you will not undermine the consensus that has been built."

The commitment to increase the basic state pension in line with earnings rather than inflation is viewed by the Government as being a "crucial pillar" of its pensions settlement, which will see the age at which people can receive their state pension increase to 68 by 2046.

The number of years it takes to build a full basic state pension will also be reduced from 44 years for men and 39 years for women to 30 years for everyone.

But the Conservatives later said they were still committed to maintaining the link between earnings and the basic state pension.

I liked the Will Hutton article

Will Hutton (or his ghost writer?) contributed this rather interesting piece to The Observer this week. I find Hutton's writings a bit hit and miss but I find myself agreeing with him more times than not. The bit on the RMT's recent tube strike seems to be pretty fair to me though. I haven't come across anyone outside the movement who had any sympathy for the recent strike, and quite a few people on the inside feel the same way too from what I can tell. It looked like a particularly odd decision given that the TSSA and Unite both called off strike action.

But it's not so much the specifics of the tube strike I agree with, more the argument about how unions should relate to working people today. My broad view on this is that you need to use different tactics in different areas. There will always be a place for a militant approach to industrial relations, because that is the stance that some employers will take.

However I don't believe that most working people's experience of work is like that these days. Therefore if we are going to organise those people currently not in unions we need to talk and act in a way that appeals to them, and I don't think banging on about class struggle and bosses v workers is ever going to work. You only have to think about your own family and circle of friends who aren't in a union. How many of them say it's because unions aren't militant enough, or because the union doesn't back a boycott of Isreal?

The TUC did some research into "what workers want" a few years back. It found that few employees have a negative view of their employer, most have a positive view about their job, and an overwhelming majority regard a productive employer-union relationship as a necessary condition for the union to be seen as effective. Not exactly a demand to intensify the class struggle is it?

Unfortunately union politics shifted a few years back to extent that even mentioning the idea of partnership is a bit of a joke these days. But personally I can't see unions regaining their lost strength unless some sort of modernisation is undertaken. On this point, this Fabian pamphlet is woth a look.

PS. Will Hutton's other recent article on the financial system here is also worth a look.

Thursday 6 September 2007

McCreevy downplays talk of hedge fund regulation

EU internal market commissioner Charlie McCreevy has never been noted for his enthusiasm for intervention in the capital markets. True to form he is quick to absolve them of blame for the recent financial turmoil (is it a crisis, yet?). I blogged earlier this week about some political appetite to look at hedge fund operations, McCreevy clearly isn't onside.

From today's Times:

Charlie McCreevy, the European Internal Market Commissioner, said yesterday that hedge funds had been particularly active in troubled structured credit markets, but absolved them of any blame for this summer’s financial turbulence.

Conceding that many hedge funds and their “wealthy private or institutional investors” may have incurred heavy losses in recent months, he maintained that this was no reason for regulators suddenly to intervene.

“Financial markets function on risk. I do not criticise those who make fortunes when times are good. I’m not going to shed any tears now if there are losses,” he told the European Parliament in Strasbourg.

As MEPs debated the consequences of the events sparked off by the sub-prime mortgage crisis in the US, Mr McCreevy insisted: “As much as some people want to demonise hedge funds, they are not the cause of the difficulties in the market.”

Instead, these had been provoked by poor-quality lending, compounded by securitisation of loans in off-balance sheet vehicles, whose associated risks few understood.

It was these issues, he added, that prudential authorities and supervisors would now need to address.

The Commissioner’s dogged opposition to regulatory action was in marked contrast to the many calls from European legislators for tougher measures against financial operations that had been largely conducted outside traditional regulated markets. Led by socialist MEPs, these calls attracted support from across the political spectrum.

Ieke van den Burg, the Dutch socialist MEP, gave warning that the absence of regulation for new, highly complex financial products meant a proliferation of risks for individuals and markets. “We really have to think where these blind spots are leading to and need to look at the possibility of regulation,” she said.

Poul Nyrup Rasmussen, a socialist MEP and former Danish Prime Minister, described the financial crisis as “a wake-up call for all of us, but especially Mr McCreevy”. He challenged the Commissioner to bring forward appropriate legislation.

From the centre-right, Karsten Hoppenstedt, a German Christian Democrat member, insisted that the failure to assess the risks of the new financial instruments was the source of the crisis. He argued that hedge funds should be covered by existing EU legislation on capital requirements, risk management systems and internal controls.

While defending hedge funds, Mr McCreevy conceded that the spotlight should be turned on credit rating agencies.

He reminded MEPs that he had already criticised the agencies for being slow in downgrading their ratings for structured finance backed by sub-prime lending.

He raised the question of potential conflicts of interest when agencies advise banks on how to structure their offering to gain the best mix of ratings, while at the same time providing assessments on which investors rely.

Mr McCreevy confirmed that he would be discussing with European securities regulators and with countries such as the US how to inject more transparency into the credit rating agencies’ operations. The discussions will also investigate whether the agencies were responsible for unwarranted rating inflation for structured products.

Pensions hypocrisy

It's pretty hard to miss the TUC's annual Pensionswatch survey today, as it seems to be in all the national papers. The survey, which you can download here, looks at directors' pensions at the UK's biggest companies.

The CBI in particular have often banged on about public sector worker's pensions, helping create the misleading impression that all employees can go at 60 on full pensions. Well it turns out that most directors have a normal retirement age of 60 too - why isn't the CBI called for that to go up to 65? Plus the majority of them are offered an accrual rate in DB schemes of 1/30ths!

Is there any good reason why directors whould get a better accrual rate than other employees in the same company?

Here is the exec summary of the TUC report:

Key PensionsWatch 2007 findings:

Directors of the UK's top companies share pensions with guaranteed pay-outs (known as defined benefits, DB, or final salary schemes) worth nearly £1 billion (£891 million). On average each director's pension is worth £3 million. The average for directors with the largest pension in each company is £5.3 million.

The average director's DB pension would pay out more than £193,000 a year, 25 times the average occupational pension. For the directors with the biggest pension in each company, the average would be over £320,000 a year, over 42 times the average for all employees (£7,592).

The proportion of directors with final salary pensions is 79 per cent.
59% of companies have closed final salary schemes to new staff in recent years.
38 out of the 49 companies where information is available (78%) allow directors to retire on a full pension at 60.

For companies who reveal the information, directors' pensions grow twice as fast (1/30ths) as the most common rate for employees in DB schemes (1/60ths), meaning that it takes staff 40 years, on average, to reach full pension but directors only half that time.

Where directors are in money purchase schemes, where the pension will depend on the ups and downs of investments (defined contribution or DC), the average reported annual employer contribution is £86,000. The average for company directors receiving the highest payment in each company is £147,000. Employer contributions to directors' DC schemes was, on average, the equivalent of around 20% cent of salary, compared to the average for all employees with a DC scheme and employer contributions of just 5.8 per cent.

The highest annual employer contribution to a director's defined contribution pension was £988,732, the rest of the five biggest annual contributions range from £261,000 - £382,000.

Wednesday 5 September 2007

Market turmoil may lead UK & US to rethink on hedge funds

This is a bit speculative, but possibly a good sign if accurate. This is from the Thomson Investment Management News website which is free to subscribe to.

LONDON (Thomson IM) - The US and UK are likely to change their stance on hedge fund transparency regulation in view of the recent market turbulence, the German finance minister Peer Steinbrueck said at a conference.

The minister stressed in his speech at the Banken im Umbruch event that higher transparency is at the heart of the G8 agenda. Germany had put hedge fund regulation high on the agenda of its year-long G8 presidency, given its concerns that rapid growth in the sector could destabilise the global financial system.

The German government, the minister continued, had started 'an intensive debate over the limitation of potential systemic risks in the financial markets.' At the G8 summit in Heiligendamm in June, however, little progress was made on the issue and the UK and the US have so far proved 'hesitant' he said.

'Perhaps they still remember that I set this topic early at the beginning of this year's political agenda. I could envisage that the initially rather hesitant attitude of the USA and Great Britain could still change before our next meeting, in the light of the current crisis,' Steinbrueck said.

He went on to say that the UK hedge fund working group, launched to review voluntary best practice, and the US initiative of the President's Working Group on Financial Markets (PWG), were a step in the right direction.

Tuesday 4 September 2007

Advertising is the propaganda of capitalism

A bit off-topic, but it struck me the other day that quite a lot of companies get pulled up for dodgy advertising. The most recent case I noticed was RyanAir (boo hiss) getting banned from repeating its claim that only the "very rich or very slow" get the Eurostar to Brussells, as opposed the glamour of flying with RyanAir. The only problem was that when you factor in the reality that the airports serving both cities are quite a bit out of town, the claim that flying is quicker turns out to be rather unfounded.

That reminded me that RyanAir was also pulled up for claiming that air travel accounts for just 2% of carbon emmissions. Again, a misleading claim.

Then I also spotted this rather excellent ticking off Kraft, for the makers of Dairylea. The firm had claimed one of its Dairylea products aimed at kids was "packed full of good stuff", when they really should have said "packed full of saturated fat and salt", a minor slip.

And to round off the recent run of such stories, HSBC was criticised for running an ad suggesting that their customers would not incur charges for using ATMs overseas, when in fact they would incur charges for using ATMs overseas. You notice the slight difference.

I'm sure we all expect advertisers to put the best possible gloss on what they are offering, but in these cases well-known public companies have run adverts which put across messages that are almost the opposite of the truth. Using the plane is slower, not faster. The food has bad stuff in it, not good stuff. Etc etc.

Maybe this kind of propaganda ought to make it onto the radar of responsible investors? If the company is indulging in such blatant disinformation in public, what's going on behind closed doors?

PS. A quick plug for the ITF Ryan Be Fair campaign site here.

Monday 3 September 2007

Default decisions...

Just a quickie on this story from Tory-supporting fund manager Fidelity. They reckon members of DC schemes who opt for the default investment fund could be losing out on up to £3,600 a year. I've already seen this story run without question on a couple of pension websites, but it's worth bearing in mind a couple of things.

First, the calculations are based on an individual putting away £300 a month into a DC scheme. I think that is pretty optimistic. For someone on an average full-time wage (about £25k) that must be about 15% of salary. No-one is going to put that much away on their own, and it's rare for even joint employer/employee contributions to reach that level. For example the NAPF reckons that average contribution rates to DC schemes in total are only 9%. To be putting away £300 as a 9% contribution you need to be on £40k, not £25k. So the optimistic assumptions on contribution rates inflate the possible impact.

Secondly, I'm really wary of these kinds of studies by fund managers as they only ever seem to be intended to encourage trustees to increase the range of fund choices open to members. Yet the White Paper on Personal Accounts quotes research suggesting that more fund choices confuse the punters and make them... er.... less likely to choose. The Swedish top-up pension scheme has hundreds of choices yet still 90% plus end up in the default.

Surely therefore what we should really be concentrating is not on offering more (and more expensive) fund options, but getting the design of the default fund right.