Tuesday 23 February 2016

UK and US union pension funds challenge Pearson

UK and US union pension funds fear for Pearson PLC business plans

Serious concerns about the performance of Pearson PLC, the world’s biggest education publisher, have prompted a trans-Atlantic alliance of pension funds – which includes UNISON’s staff pension fund – to call on the company to review its business strategy in the wake of four straight profit warnings, tumbling revenue and plunging stock prices.
The coalition of pension funds – representing over 40,000 of Pearson’s voting shares – have lodged a shareholder resolution, which will be heard at the company’s AGM in London later this year. The resolution urges the education conglomerate to look again at its future business plans, and calls on it to end its over-reliance on the education testing programme in the US, which has been affected by a recent change in the law and is also becoming increasingly unpopular over there.
The union pension funds resolution – which aside from UNISON is signed by the Chicago Teachers Pension Fund, Trade Union Fund Managers and 130 individual shareholders – also calls for a halt to the multinational’s plans to create schools for profit in parts of the world where there are no proper state education systems.
Last month Pearson announced that 4,000 jobs (ten per cent of the company’s workforce) were to go across its worldwide operation, in an attempt to turn around a business that has lost 42 per cent from its share value in the last twelve months. Pearson also issued its second profits warning in three months – its fourth under the current chief executive.
Union pension funds are so concerned by the company’s recent business performance that they decided to lay the shareholder resolution, and are holding a shareholder briefing later this month, in advance of the Pearson AGM in late April. Their concern is that without a clear recovery plan, their investment in Pearson stock will continue to fall, jeopardising pension payments to current and future pensioners.
UNISON General Secretary Dave Prentis, whose union holds 33,000 Pearson shares, said: “UNISON will be raising serious concerns about how Pearson Plc is being run at its annual meeting this April.
“The company is failing to respond to changes in the education market in the United States, where it makes 60 per cent of its profits. With the movement against compulsory testing growing in popularity across America, there’s an increasing likelihood that many cash-strapped states could look to reduce or even axe their testing budgets.
“Pearson has put too many of its eggs in the US testing basket and unions are right to be concerned that the company risks gambling away the current and future pensions of hardworking public sector employees. The company is shedding thousands of jobs in an attempt to turn the business around, but this flawed approach won’t address the deeper problems in its main US market.
“Rather than continue to focus the business on politically poisonous high stakes testing, and axing the jobs of thousands of employees, CEO John Fallon should be conducting a wholesale reassessment of Pearson’s strategic vision.”
Pearson analysts, including Liberum’s Ian Whittaker, have pointed out the firm is facing an existential problem, not just a cyclical one. Whittaker said last month’s cost cutting announcement “strengthen[s] our conviction that this company is both facing severe structural headwinds and is showing an unwillingness to face up to its issues.”
The union pension funds believe that by clinging to the status-quo, Pearson has created wholly avoidable financial and reputational risks, eroded shareholder value and poisoned its global brand, increasing the chance that hedge funds will be attracted to the stock.
Randi Weingarten of the American Federation of Teachers, the national affiliate of the Chicago Teachers Union, said: “Pearson could be a company that provides educational products and services critical to the success of students around the world. Instead it has decided to embark on a politically risky path of high-stakes testing and low-fee private schools in the developing world.
“This resolution is about creating a better, more profitable, more economically sustainable firm that works to advance public education in a spirit of collaboration. If maintaining the status-quo is the answer, the Pearson board is asking the wrong question.”

Tuesday 16 February 2016

Caledonia update

Just to clear up the mystery of those donations tagged to the Conservative Party that I blogged about last year, I've had the email below from the Electoral Commission. Basically the Tories mucked up their admin -

Dear Mr Powdrill,
You contacted me last year about two donations to the Conservative Party that we published on our website PEF Online, which were reported as from Caledonia Investments PLC.
Both turned out to have been due to administrative errors, and the Conservative Party has now reported the donations from the correct donors:

Thursday 11 February 2016

Blog on workers' capital

I've got a piece up on Left Foot Forward today about workers' capital as part of #heartunions week. Have a read here.

Sunday 7 February 2016

Labour and infrastructure

Via twitter, I picked up this interesting piece on how Labour's stance towards business could be made a bit more coherent. I thought I would bung up some thoughts on the points made about infrastructure, and what might be achievable here.

First up, I think we have to be clear about who wants what, and when. It's not quite as simple as saying that infrastructure needs finance and investors want to invest in/own infrastructure. Politicians want non-government finance to support the construction of new infrastructure. Pension funds and other institutional investors looking for a bond substitute generally want to own infrastructure that has already been built. Politicians are focused on greenfield, pension funds are more interested in brownfield.

This is because, again generalising, the risk return characteristics of infrastructure assets change over time. In the construction phase there are lot of unpredictable risks, so investors are going to want a premium in return for shouldering them. In the operational phase everything is more predictable (though political and reputational are maybe bigger factors than assumed) and the pay-off is lower. This means that, as an investment, infrastructure looks different depending on when the investment is to take place. As one report I read put it, infrastructure assets begin like venture capital/private equity, and become more like bonds.

It also varies by the sector that the infrastructure asset relates to. If you look at the risk-return characteristics of various types of infrastructure then you may find that existent social infrastructure (schools & hospitals) provides a nice fit if you are a pension fund looking for something bond-like. It's perhaps not surprising that the first investments of the Pensions Infrastructure Platform were in the secondary PFI market. The funds bought into existing assets (or project companies tied to the assets - the ownership of the asset usually resides with the public sector) rather than funding any new construction. Other markets see more pension fund investment in greenfield, but from what I've seen most UK investment is brownfield.

You can argue that the existence of a institutional investor market for brownfield infrastructure provides an out for those that are willing to finance greenfield. So the fact there is a secondary market to sell into allows initial investors to sell up, move on and hopefully finance the next greenfield project. But that is a slightly different pitch. Alternatively you could try and attract pension fund capital looking for an inflation hedge into greenfield investments by doing something to the financing to change the risk/return characteristics, like providing an underpin. But that ups the cost of financing, and might look worse than PFI!

I think it's also important to note that, as with pension fund investment more generally, most infrastructure is undertaken through intermediaries, rather than directly. This means that the time horizons of the investor are actually those of an asset manager. This is important, as there has been some unease about the structure of some infrastructure funds, which are built with a view to the manager being able to sell on assets within a few years rather than considering that a pension fund might want to own it for decades. This is changing. Some of the largest pension funds invest directly, and some asset managers have developed so-called "evergreen" funds. But the picture in unlisted funds is broadly like private equity more generally. The holding period for a particular asset might be half a dozen years or so.

Finally, we need to be aware that ESG criteria are not well embedded in infrastructure. Of course you might consider that some infrastructure investment is inherently "responsible" since it can involve the construction of wind farms and other renewables. But, as I wrote previously' labour issues can struggle to get attention in responsible investment overall, and this definitely extends to infrastructure (see DCT Gdansk for details). This is true for asset owners as much as asset managers sometimes. More specifically, I do not believe that in the UK infrastructure investment currently considers the need to respect workers' rights. It was notable that even the Labour-commissioned Armitt Review failed to address this.

Incidentally, I think this is particularly tricky in relation to greenfield. If you are building a new rail link I think you can make some decent projections about the potential environmental impact. You know what the immediate physical impact will be, and can model carbon footprint etc. But how do you do the same for labour issues? How can you tell in advance if the employer will genuinely respect workplace rights, or, on the other hand, if they will exploit precarious work by keeping workers on temporary contracts? How do you track this if the economic employer changes when the asset is sold on post-construction?

I don't mean to sound negative above, I'm just setting out what I've discovered in my own work around infrastructure. So I would suggest a few general, if obvious, guidelines. First, and most important, pension fund investment in infrastructure should only take place if it is in the interests of the beneficiaries. Second, government should consider whether pension fund investment in infrastructure is the cheapest financing option - I do wonder if we risk creating "pension fund PFI", another off balance sheet model that is more expansive that government borrowing. We do not want to crowd out the public sector. Third, a Labour approach to this issue must promote rigorous ESG standards, particularly with respect to workplace issues. And if we get back in power there should be union representation on the National Infrastructure Commission.

Friday 5 February 2016

TUC Fund Manager Voting Survey 2015

The TUC's annual voting survey - its 12th! - is out today. Two things I would flag up - the votes on the shareholder resolution at National Express (a rare case of a res explicitly on labour issues) and the votes on the bonus cap at the banks. Both indicate there is a long way to go.

Press blurb below, PDF of the survey itself here.

The TUC is today (Friday) publishing its latest report on fund manager voting. The survey looks at the voting records of fund managers, pension funds and proxy voting agencies in 2014. It is the 12th such survey conducted by the TUC, but the first one since the new rules have been in place to require binding votes on remuneration policy.
Companies are now required to hold AGM votes on:
  1. Remuneration policy – in 2013 the UK government introduced a binding vote for shareholders on future remuneration policy.
  2. Remuneration reports – in 2003 the UK government introduced an advisory vote focussed on directors’ remuneration over the preceding year.
  3. Bank bonuses – in 2013 the EU agreed a new cap on bankers’ bonuses of 100% of fixed pay; but it can rise to 200% if approved by a vote of shareholders.
Since their introduction in 2003, remuneration reports have typically attracted the highest level of opposition on AGM agendas. However, this is now being surpassed by even higher opposition for the new binding votes on remuneration policy.
In the current survey, median support for retrospective remuneration reports was at 40%, whereas median support for future remuneration policy was just 27%.
The TUC suggests that this may be because fund managers believe they can have more influence through remuneration policy votes, as they are forward looking, and binding. By contrast, remuneration reports are on remuneration that has already been paid, and the shareholder vote is only advisory.
The TUC welcomes the message sent to boardrooms by the votes of the survey respondents. If other shareholders had voted similarly, most remuneration policies covered in the survey would have been rejected, forcing boardrooms to rethink their pay culture.
But despite survey respondents dissenting on remuneration policies, on the specific issue of bank bonuses they were more compliant. 22 of 29 respondents approved 200% bonuses for all the banks in which they hold stock – a median support rate of 100% (and a mean support rate of 85%).
Incentive structures in place in the banking sector contributed to excessive risk taking that precipitated the financial crisis, says the TUC. It is therefore disappointing that the vast majority of fund managers have not used the new opportunity provided to shareholders to vote against bonuses above 100% of fixed pay.
Overall, while there is evidence from the survey of a significant block of investors showing concerns over boardroom pay in their AGM voting, the TUC says there is not yet enough shareholder dissent to stop there being a ‘business as usual’ attitude to remuneration and bonuses in the boardroom. All the remuneration policies covered by the survey were passed at company AGMs because fund managers who responded to the survey were outweighed by votes from other investors.
TUC General Secretary Frances O’Grady said:
“The public’s unhappiness about excess boardroom pay is being represented at company AGMs by at least some of the people who manage their savings, investments and pension funds. We hope that their influence will extend to more shareholders. AGMs should not be rubber-stamping sessions and all shareholders should recognise the responsibility they have in holding boardrooms to account.
“The lack of shareholder dissent over bank bonuses, even from investors in our survey, is a particular concern given how pay incentives contributed to the risk taking by banks that led to the financial crisis.
“These new voting rules and reports are simply not enough to produce the major culture-change needed. It’s time for executive pay in the UK to be modernised by the addition of workers representatives to remuneration committees.”
- This is the TUC’s twelfth fund manager voting survey. It is intended to give trustees and others information on how fund managers exercise voting rights in relation to controversial issues as company AGMS. It presents the full voting data, and provides voting analysis by investor, and by company. A full copy can be found at XXX.
- The survey covered 61 resolutions on which voting and engagement data was sought and was sent to 46 investors, 30 of which (65%) responded. The full list of respondents is: Aberdeen Asset Management PLC, Aviva Investors, Axa Investment Managers, BA Pension Investment Management Ltd, Baillie Gifford, Baring Asset Management, BMO Global Asset Management, CCLA, Columbia Threadneedle Investments EMEA, EdenTree Investment Management, Environment Agency Pension Fund, Fidelity Worldwide Investment, Goldman Sachs Asset Management, Henderson Global Investors, Hermes,  HSBC Global Asset Management (UK), J.P. Morgan Asset Management, Jupiter Asset Management, Kames Capital, Legal & General Investment Management, Newton Investment Management, PIRC, Royal London Asset Management (RLAM), RPMI Railpen Investments, Sarasin & Partners LLP, Schroders, Standard Life Investments (SLI), State Street Global Advisors (SSGA), TUSO (Trade Union Share Owners), Universities Superannuation Scheme.

Monday 1 February 2016

Infrastructure investors need to respect workers too

A demonstration has been held outside the Frankfurt office of Macquarie today to protest its failure to resolve ongoing problems at DCT Gdansk (blogged about previously here), where it is the majority owner. Pic of the demo and press statement below....

ITF/ETF dockers call on Macquarie to secure dignity for Gdansk workers 

Dockworkers will hold protests in locations across Europe over the next ten days to demonstrate their objection to the poor treatment of workers in the Port of Gdansk, Poland.
Members of ITF (International Transport Workers’ Federation)- /ETF (European Transport Workers’ Federation)- affiliated union Solidarnosc who work at Deepwater Container Terminal (DCT) Gdansk, have faced constant obstruction from their employer over the past two and half years as they have sought a collective bargaining agreement (CBA). In particular there is concern over the number of union leaders and activists who have had their contracts of employment terminated during this period.DCT Gdansk SA is registered in Poland but is majority owned and managed by Australian financial services and asset management company Macquarie, which has several representatives on the supervisory board. Macquarie’s shareholding in DCT Gdansk is held through its Global Infrastructure Fund II (GIF II).Three demonstrations will take place outside Macquarie offices with senior company representatives being called on to meet with ITF/ETF officials to discuss the role they could play in bringing about a resolution to the ongoing dispute.Vice chair of the ITF dockers’ section Torben Seebold said: “Solidarnosc members at DCT are seeking a decent CBA, reinstatement of their representatives and colleagues and improvements to pay and contracts of employment. Macquarie can help to make that happen."