Based on some of the commentary you hear from the Tories (and sometimes the Lib Dems), and unfortunately also from the pensions industry sometimes, you might assume that public sector pension schemes were somehow uniquely and unjustifiably generous.
Not so. Luckily, because unions are still strong in the public sector, we have managed to retain decent final salary schemes, but even here there have been 'reforms' (ie higher normal retirement age for new starters). Public sector schemes were comparable to typical private sector schemes until a few years ago when the pension crisis kicked in. It's not public sector pensions that are unjustifiably generous, it's private sector pensions that have become unjustifiably poor. As I have argued many times before, the withdrawal by employers of decent pension provision in the private sector is a massive defeat for the labour movement and, in my opinion, effectively a significant (but unrecognised) pay cut.
This isn't so say there aren't some outlier pension schemes with extremely generous terms still out there - there are. Most people will be familiar with the example pf the MPs pension scheme. This is a final salary scheme with a normal accrual rate of 1/50ths, although members can opt to pay a higher contribution rate to gain an accrual rate of 1/40ths. I think the normal retirement age is 65. As much as I hate agreeing with the likes of the Daily Mail, I do struggle to see the justification for MPs getting a pension scheme that is more generous than those for almost all other people in the UK. Maybe they should have a scheme that reflects average final salary provision across the workforce as a whole?
I say that MPs have a pension scheme that is more generous than those for almost everyone else with good reason. Because directors of large companies award themselves pensions that are more generous than any other I have come across in the UK. Where they are offered final salary schemes, a large number of directors have an accrual rate of 1/30ths, and most have a normal retirement age of 60. And even when they do get offered defined contribution provision, directors get a much higher contribution rate from the company - on average 20%! What makes this worse is that employees in the same companies get a much worse deal. See the TUC's annual Pensionswatch report for more details.
Now I accept that those with significant responsibilities in charge of large organisations are going to be paid more than the rest of us, but that already means that they are going to get larger pensions. Why should they also get better accrual or contribution rates to boost their provision further? To me that really is unjustifiable. Incidentally the TUC argues that the solution is for directors to be in the same type of scheme on the same terms as their employers. So if directors get DB, staff get DB, and if directors get to draw an unreduced pension at 60, so does the rest of the workforce. Sounds sensible to me?
Sunday, 6 January 2008
Friday, 4 January 2008
Fidelity replies... again
The mystery deepens... I've just got home from work to find a response from Fidelity. In my last letter I asked them if they planned to make future donations to the Tories, and why they have only made donations to the Tories. I also made it clear that I needed to know whether they plan to make future donations as this will affect whether we keep our savings with them.
They don't answer either question, and what's more it turns out that they have a policy not to discuss their future plans for political donations which applies to all clients, so unfortunately they can't tell me. It would be interesting to see if a pension fund client would receive the same response.
In the meantime I'm going to think over what to do next. Clearly I don't want to leave our money with a Tory-supporting fund manager. But equally I don't want to go through the hassle and expense of switching if the donations have ceased. If Fidelity donated to the Tories in Q4 of 2007 this probably won't appear on the Electoral Commission website for another month or so.
I'll update you with our future plans shortly, until then here's the latest letter. (by the way my surname isn't XXX, unfortunately)
They don't answer either question, and what's more it turns out that they have a policy not to discuss their future plans for political donations which applies to all clients, so unfortunately they can't tell me. It would be interesting to see if a pension fund client would receive the same response.
In the meantime I'm going to think over what to do next. Clearly I don't want to leave our money with a Tory-supporting fund manager. But equally I don't want to go through the hassle and expense of switching if the donations have ceased. If Fidelity donated to the Tories in Q4 of 2007 this probably won't appear on the Electoral Commission website for another month or so.
I'll update you with our future plans shortly, until then here's the latest letter. (by the way my surname isn't XXX, unfortunately)
Dear Mr XXX
Thank you for your letter regarding Fidelity donations received on 18 December 2007. I am sorry you were not satisfied with our response.
I understand you want a clear answer on the intention behind Fidelity's donations, and our future plans regarding our donations.
As previously stated, we make donations to political parties as part of a wider programme of activity to foster debate on key policy issues that may affect our clients. All our donations are made public through the electoral commission's website and are available for all to see.
I must reiterate that we cannot discuss our plans for future donations. I'm sorry I cannot be of any further help in this regard, but this is a Fidelity policy inclusive of all clients and we cannot make an exception in this case.
I appreciate that you disagree with particular donations that have been previously made by Fidelity, and that these may affect your decision regarding your investment with us. We greatly value your business and are saddened that you are considering moving your investments elsewhere due to this issue. Unfortunately, we cannot change our position on this matter.
If you remain dissatisfied with my response, you can refere your complaint to the Financial Ombudsman Service (FOS), at the address that was given in my previous correspondence.
If you should require any further information please do not hesitate to contact me directly on XXX. My extension number is XXX and I am available Minday to Friday from 9am to 6pm.
Yours sincerely
'Milking' pension schemes
Here's a bit of strange comment from a marketing person at Gissings (a second-tier actuarial firm). It is in response to news that both the Pension Protection Fund levy and the general levy (that pays for the Pensions Regulator, Ombudsman etc) are increasing:
According to the story the comment appeared in - which is here - the levies will jointly total £62m over the following year, of which about £20m is for the PPF. Funnily enough the NAPF also makes a bit of a point about the increase in levies, which it says have gone up 530% since 2005 (see the table at the bottom of page 3 of this release).
So here come my grumbles. First the increase in levies isn't that surprising given that the PPF one is only a couple of years old (which probably explains the NAPF figure) plus the evolving nature of it. Equally some of us think its a good thing that pension schemes pay levies that fund a protection fund that covers all of them (like an insurance policy) and as such incentivises responsible stewardship of assets.
But more annoying is the idea that this is 'milking' pension funds. For one, these levies have a clear purpose. Also people who work for the likes of the PPF, Pensions Regulator, Ombudsman etc I have no doubt are paid less than other organisations - like consulting actuarial firms - that also charge schemes money. As I have posted about before, my local council fund pays out approx £2m in fund management fees a year, and that's a relatively small fund in local government pension scheme terms. And I am deeply sceptical that active fund management is even worth paying for!
By all means let's keep a close eye on how the levies are spent. But let's also bear in mind that the entire pensions industry owes its livelihood to the charges it takes out of pension schemes - typically much higher that regulatory levies. You never see a fund manager turn up in a cheap suit do you? Who is really doing the milking? One to remember next time your fund manager offers you a 'free' corporate jolly.
"Surely these organisations must realise that cost control is vital. They cannot allow themselves to be considered to be arrogantly milking pension schemes at will. What they are doing is tantamount to a tax on pension funds."
According to the story the comment appeared in - which is here - the levies will jointly total £62m over the following year, of which about £20m is for the PPF. Funnily enough the NAPF also makes a bit of a point about the increase in levies, which it says have gone up 530% since 2005 (see the table at the bottom of page 3 of this release).
So here come my grumbles. First the increase in levies isn't that surprising given that the PPF one is only a couple of years old (which probably explains the NAPF figure) plus the evolving nature of it. Equally some of us think its a good thing that pension schemes pay levies that fund a protection fund that covers all of them (like an insurance policy) and as such incentivises responsible stewardship of assets.
But more annoying is the idea that this is 'milking' pension funds. For one, these levies have a clear purpose. Also people who work for the likes of the PPF, Pensions Regulator, Ombudsman etc I have no doubt are paid less than other organisations - like consulting actuarial firms - that also charge schemes money. As I have posted about before, my local council fund pays out approx £2m in fund management fees a year, and that's a relatively small fund in local government pension scheme terms. And I am deeply sceptical that active fund management is even worth paying for!
By all means let's keep a close eye on how the levies are spent. But let's also bear in mind that the entire pensions industry owes its livelihood to the charges it takes out of pension schemes - typically much higher that regulatory levies. You never see a fund manager turn up in a cheap suit do you? Who is really doing the milking? One to remember next time your fund manager offers you a 'free' corporate jolly.
Follow the money...
I'm still digging around to see which fund managers voted in favour of Caledonia Investments giving £60K to the Tories at the investment trust's AGM back in July. See previous posts here and here.
My latest discovery is that M&G (the Pru's retail fund management business) ABSTAINED on the proposal. See page 93 here, proposal number 15.
The list so far -
Co-operative Insurance - AGAINST
F&C - AGAINST
Insight Investment - FOR
M&G - ABSTAIN
I've also looked at the records of Hendersons and Standard Life, but neither feature it in their reports. However because these two report votes by exception (ie they don't report votes cast in favour of management) it's impossible to tell if they voted for the resolution or whether they simply didn't have an investment in Caledonia at the time. Yet another example of why a voluntarist approach to voting disclosure does not work effectively.
My latest discovery is that M&G (the Pru's retail fund management business) ABSTAINED on the proposal. See page 93 here, proposal number 15.
The list so far -
Co-operative Insurance - AGAINST
F&C - AGAINST
Insight Investment - FOR
M&G - ABSTAIN
I've also looked at the records of Hendersons and Standard Life, but neither feature it in their reports. However because these two report votes by exception (ie they don't report votes cast in favour of management) it's impossible to tell if they voted for the resolution or whether they simply didn't have an investment in Caledonia at the time. Yet another example of why a voluntarist approach to voting disclosure does not work effectively.
Thursday, 3 January 2008
Dubya drives Darfur disinvestment
How's that for alliteration? Full story here.
CRAWFORD, Texas (Reuters) - President George W. Bush on Monday signed into a law a measure aimed at allowing states, local governments, mutual funds and pension funds to divest from Sudan businesses, particularly its oil sectors.
Some 20 U.S. states have initiated divestment efforts because of the conflict in Sudan's Darfur region, which has taken some 200,000 lives and displaced some 2.5 million since rebels took up arms against the government in 2003.
But the effort in Illinois was challenged in court so the new law seeks to provide a legal framework for divestment from companies involved in Sudan's oil industry, mineral extraction, power production and the production of military equipment.
Bush has called the deaths in the Darfur conflict genocide, a charge the Sudanese government has rejected.
"My administration will continue its efforts to bring about significant improvements in the conditions in Sudan through sanctions against the government of Sudan and high-level diplomatic engagement and by supporting the deployment of peacekeepers in Darfur," Bush said in a statement.
But at the same time, he argued some provisions of the new law could interfere with his ability to conduct foreign policy and therefore he would "construe and enforce this legislation in a manner that does not conflict with that authority."
White House spokesman Scott Stanzel said the administration would review divestment policies adopted by states and local governments to ensure they are consistent with the president's foreign policy and take action if necessary.
But Stanzel stressed that Bush signed the measure because "the president broadly agrees with the aim of the sponsors, that doing business with Sudan should be discouraged."
Levelling down - who is to blame?
One thing you can't accuse the pensions industry of is reluctance to use alarmist language. Add to that its desire to see everything that goes wrong as being the fault of stupid, meddling politicians/civil servants. As an example of this, I was struck by the following bizarre assertion in the Association of Consulting Actuaries' pension scheme survey which you can find here. Having had a pop at the Government for not doing enough to prevent levelling down, the ACA claims -
Two things bother me about this. The first is that this paragraph - and much of the ACA's commentary in the report - seem to portray levelling down as an inevitable reaction to the Government's reforms. It suggests that firms have no choice but to close DB schemes and pay low contributions into DC schemes. Whilst I do not underestimate the cost pressures some companies are under, absolving them of any responsibility for the decisions they make in respect of pension provision for staff clearly goes too far. They have a choice whether to pay 3%, or 5% or zero.
Secondly, when people talk about 'levelling down' they mean the way that some firms will use the introduction of a minimum standard as a reason to reduce current provision to the specified minimum. Again they have a choice whether to do this. But you can see that since the Government is saying that employers only have to pay 3% into Personal Accounts this might offer unscrupulous employers the cover to reduce their contributions to that level if they are currently paying.
There's just one problem. Personal Accounts don't come into effect until 2012, so how can companies be 'levelling down' to something that doesn't exist? According to the ACA this has been happening for some time, but what exactly are employers levelling down to, since there is currently no minimum? In fact the reality is that many employers have always levelled down - to zero - which is why, even at its highpoint, occupational pension coverage never got much above half the workforce. That is exactly why some sort of minimum threshold is required. No doubt some employers will level down - and no doubt some will be advised on such decisions by consulting actuaries - but many employers will also have to level up. That means that coverage will increase, likely particularly amongst women.
The ACA commentary is particularly frustrating as much of the rest of what they say sounds sensible, for example their promotion of risk-sharing schemes (though these would of course provide work for... err... actuaries). But the kneejerk 'levelling down' commentary makes you question their judgement elsewhere.
"[T]he survey results from this and other surveys shows ample evidence that levelling-down has been happening for some time and is predicted to continue apace by those who run private sector firms and schemes."
Two things bother me about this. The first is that this paragraph - and much of the ACA's commentary in the report - seem to portray levelling down as an inevitable reaction to the Government's reforms. It suggests that firms have no choice but to close DB schemes and pay low contributions into DC schemes. Whilst I do not underestimate the cost pressures some companies are under, absolving them of any responsibility for the decisions they make in respect of pension provision for staff clearly goes too far. They have a choice whether to pay 3%, or 5% or zero.
Secondly, when people talk about 'levelling down' they mean the way that some firms will use the introduction of a minimum standard as a reason to reduce current provision to the specified minimum. Again they have a choice whether to do this. But you can see that since the Government is saying that employers only have to pay 3% into Personal Accounts this might offer unscrupulous employers the cover to reduce their contributions to that level if they are currently paying.
There's just one problem. Personal Accounts don't come into effect until 2012, so how can companies be 'levelling down' to something that doesn't exist? According to the ACA this has been happening for some time, but what exactly are employers levelling down to, since there is currently no minimum? In fact the reality is that many employers have always levelled down - to zero - which is why, even at its highpoint, occupational pension coverage never got much above half the workforce. That is exactly why some sort of minimum threshold is required. No doubt some employers will level down - and no doubt some will be advised on such decisions by consulting actuaries - but many employers will also have to level up. That means that coverage will increase, likely particularly amongst women.
The ACA commentary is particularly frustrating as much of the rest of what they say sounds sensible, for example their promotion of risk-sharing schemes (though these would of course provide work for... err... actuaries). But the kneejerk 'levelling down' commentary makes you question their judgement elsewhere.
Wednesday, 2 January 2008
Back to blogging
Finally back in London after a prolonged, family-visiting xmas which took in the twin cultural hotspots that are Ipswich and Bangor (the Northern Ireland one). As usual it was nice to spend a bit more time with family members we don't see that much, but it's also an opportunity to catch up on a bit of reading.
I finally managed to finish off Political Power and Corporate Control, which was well worth a read. It brings a much-needed political perspective to corporate governance, and as I have said before it's good to see a governance book take seriously the role of labour. It also sketches out why workers in liberal market economies might end up in a 'transparency coalition' with investors. This has happened in the US - unions are major players in shareholder activism - but has yet to take off here in the UK, which is something I'll come back to in a post another day.
Also I can't resist a quote from the very last page of the book where the authors comment on the changing rhetoric adopted in governance debates -
I presume the authors are mainly influenced by the US market in their comments here, and the debate over proxy access has seen many of these arguments trotted out (including a really awful editorial in the Wall Street Journal suggesting it was a union plot to get their people into the boardroom - if only it were that simple!). But it is also true of the UK, and not just of company management. More than once I have heard people claim that TU activity in respect of fund manager transparency is 'politicizing' investment management. Funnily enough, it's always opponents of the status quo who are 'political', whilst its defenders are not.
I finally managed to finish off Political Power and Corporate Control, which was well worth a read. It brings a much-needed political perspective to corporate governance, and as I have said before it's good to see a governance book take seriously the role of labour. It also sketches out why workers in liberal market economies might end up in a 'transparency coalition' with investors. This has happened in the US - unions are major players in shareholder activism - but has yet to take off here in the UK, which is something I'll come back to in a post another day.
Also I can't resist a quote from the very last page of the book where the authors comment on the changing rhetoric adopted in governance debates -
"[W]hen managers fail to perform and make money for the shareholders, these managers often embrace broader rhetorical notions of accountability, ranging from employment stability to 'sustaniable' management, to 'serving our stakeholders' rather than mere investors. But when presented with efforts to change the rules of corporate governance to make them more accountable to strictly profit-making definitions of responsibility to shareholders, these same managers go the other way, embracing narrow rhetorical notions of corporate governance as a strictly economic function - suggesting that goverance reforms risk 'politicizing' the way firms are run, and thereby open the door to rent-seeking lawyers, bureaucratic meddling, and 'populist' forces interested in social agendas, not profit."
I presume the authors are mainly influenced by the US market in their comments here, and the debate over proxy access has seen many of these arguments trotted out (including a really awful editorial in the Wall Street Journal suggesting it was a union plot to get their people into the boardroom - if only it were that simple!). But it is also true of the UK, and not just of company management. More than once I have heard people claim that TU activity in respect of fund manager transparency is 'politicizing' investment management. Funnily enough, it's always opponents of the status quo who are 'political', whilst its defenders are not.
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