Some 300 demonstrators turned up at the offices of the Dutch pension fund manager PGGM earlier this year to protest against the decision to divest from certain Israeli banks. In Tel Aviv, the Israeli government summoned the Dutch ambassador over the move.
Fossil fuel divestment is also a live issue, largely driven by students and academics. A host of names have declared their intention to offload fossil fuel holdings including The Rockefeller Foundation, and Stanford and Glasgow Universities. Other investors, like AP2 or Storebrand, have divested from specific companies.
Some divestment issues can arise overnight, the Russian invasion of Crimea being an obvious example. This has been an issue for some Dutch funds, the KLM Dutch pension fund for ground staff having divested from Russian holdings during the third quarter of 2014. Long-standing debates can also reach a tipping-point – as PGGM and PFZW experienced earlier in the year.
All this raises the issue of accountability of pension fund boards and decision makers, and the extent to which they incorporate the views of interested parties when making their decisions.
Many pension funds intentionally take members’ view into account on investment issues – whether on risk tolerance in DC schemes or ESG issues. But in many cases, members and single-issue stakeholder groups can put unexpected pressure on pension fund boards. The power of social media and the internet can magnify the intensity of issue and force the pace of decision-making.
In October’s IPE Focus Group, we asked 35 pension funds about their views on member involvement. Sixteen said they had been under pressure to change their investment policy. Nine said funds should accurately reflect the views of members, but only five had canvassed opinions.
“The job of a pension fund is to make pensions, not to get involved in politics,” says Peter Kraneveld, an international pension expert and former chief economist at the Dutch pension manager PGGM. “A pension fund can do its job only as long as it retains the trust of its membership, especially when trust is generally low. One sure way of generating trust is giving members the feeling that you care about their views.
“Restrictions should be aimed at decreasing risk. Not classic financial market risk, but rather political, or country, risk, and image risk. A pension fund doesn’t want to be seen in the company of bad guys, and it doesn’t want its investment portfolio to deteriorate when a country gets in trouble.”
There is an important distinction between DC and DB funds, as Catherine Howarth, chief executive of the UK responsible investment NGO ShareAction, points out. Where DB fund trustees and boards usually have absolute discretion and take decisions for the benefit of members as a whole, boards must take members’ view into account where the members are in the driving seat, as in a DC fund with different investment options.
So how should trustees and boards incorporate members’ views? “It is better to be proactive than react to circumstances,” believes Jane Ambachtsheer, head of Mercer Investments and leader of its global responsible investment business. “The answers to the questions should start well before the questions come up, with trustees discussing the objects of the fund, definitions of risk and their views on ESG.”
She says articulating these in advance helps trustees create a portfolio to incorporate those beliefs, and allows them and any fiduciary managers a comprehensive framework for dealing not just with one specific issue, but with others as they arise.
Ambachtsheer also believes divestment is only one of many options: “Many people may argue that shareholder engagement is more effective. There should be a mechanism for deciding at what point engagement has been unsuccessful, and moving to divestment.”
In order to set up a process for a divestment decision, funds should conduct an internal survey of groups such as trustees, investment committee members and investment staff as to which issues should take priority.
One area of conflict is whether ethical or financial issues are more important. Here, the pension fund’s own objectives have to be considered – many US hospital pension plans avoid tobacco stocks, as their business conflicts with the hospitals’ remit to promote good health.
Wider issues and restraints
There may also be legal obligations. For example, the UK Law Commission has published new guidance saying trustees may be guided by members’ views, including their ethical concerns, provided that the trustees have good reason to think a majority of members share the concern, and that these decisions do not risk financial detriment.
There are standard strategies to reduce any financial impact of divesting from specific sectors. Ambachtsheer says: “One way is to overweight other securities with similar risk/return characteristics – in the case of fossil fuel exposures, other US large-cap stocks might be candidates.”
Once views have been canvassed within the pension fund’s management, areas of consensus, or conversely, divergence can be identified. “Our view is that while members’ views should be heard, they should not necessarily be involved in making the decision, and this should be made clear to them, otherwise they may have unrealistic expectations,” says Ambachtsheer. “With sustainability, transparency is paramount, including making any divestment decision.”
The Norwegian pensions provider Storebrand uses several avenues, formal and informal, for dialogue with its stakeholders, taking on board their wishes and interests. However, Philip Ripman, senior analyst for sustainable investments at Storebrand Asset Management, says: “There must remain a strong strategic component which forms the foundation of the work we carry out. Our expertise remains looking at long-term strategy for all our clients.”
Storebrand’s policy for sustainable investments outlines its minimum expectations for companies it invests in, largely based on international law. This provides a common foundation for speaking to investment targets and customers about its expectations, requirements and transparency.
The clearer the law is on a matter, the easier it is to establish a baseline for dialogue. Storebrand has experts within their own fields who assist in developing policies and their implementation. “While dialogue remains important, our customer base is varied in their concerns and questions,” continues Ripman. “It is our job to manage these to the best of our abilities for the entire customer base.”
Processes and procedures
If a problem arises, Kraneveld suggests the first step should be a clear procedure to identify the issues. While he says that can be left to investment experts, he considers it desirable to get the endorsement of members, allowing them to add other issues, but not to remove any.
There should then be a procedure to measure the opinion of the membership, rather than a committee of experts. Kraneveld adds: “There will always be one expert whose views on an issue are well known, disqualifying them in the eyes of a pressure group with opposing views. That in turn will generate negative publicity, damaging the committee and, by extension, the pension fund. By contrast, it is hard to argue with a simple ‘Our members don’t want that’.”
However, a poll of members could cause more problems than it solves, as Thomas Knudsen, head of communications at the Danish pension provider PKA, points out if the vote is unclear or attracts a low turnout: “How should the board react?” Kraneveld considers that a vote of the whole membership would invite “emotional, manipulated and uninformed voting”.
Financial reasons for divestment are not grounds for canvassing member opinion, believes Ambachtsheer. And even if reasons for divestment are ethical, members may not be aware of the alternatives to divesting, such as further engagement with companies. “The views of members who vote may not be representative of the workplace,” she warns.
But an indicative vote can be useful, using a random sample of members to get a good cross-section of views and such polls can be carried out as part of planned contact with members, such as a regular newsletter. But funds should make clear that any such poll is part of the discussion, not part of the decision making process itself.
In order to ensure that members’ opinions are representative, Kraneveld suggests a two-tier voting structure with members electing representatives. In the Netherlands, pension funds have a members’ council (deelnemersraad). This is made up of beneficiaries who are knowledgeable in pension matters, although anyone can be a candidate.
They can be given detailed information – including the cost of investment restrictions and the influence that may have on contributions and pensions. Members can vote their representatives out of office if they wish, so there is accountability linked to their voting behaviour.
“In other countries, you could argue that trustees already represent the membership, but the trustees are less suited for this task,” says Kraneveld. “The optimal size for a decent discussion as well as a vote that is not dominated by any single person is around 15 to 25. Few pension funds will have so many trustees. Also, trustees do not represent just beneficiaries.”
How to deal with a crisis
Last January, 300 demonstrators arrived at PGGM’s head office to protest about the pension fund’s decision to divest from five Israeli banks. The demonstration was organised by the Christians for Israel pressure group. If this kind of situation blows up, Peter Kraneveld, former chief economist at PGGM, which manages PFZW’s assets, advises calling a special meeting of the members’ council, if one exists, away from protests. Members should be given throughly-prepared information and then allowed to make a decision.
“Meanwhile, meet the demonstrators with calm, understanding and transparency,” Kraneveld adds. “Try to contact the leaders, invite them for coffee, and give them a chance to put their point of view across. Hear them out, explain your procedure and promise nothing outside that procedure. Don’t try to manipulate or hinder them. Treat them seriously, not like a security risk.”
Do you need to ask?
In the UK, the Law Commission has said that survey evidence is not necessarily required when members’ views are sought. But ShareAction’s Howarth endorses the importance of surveys in seeking a representative picture of members’ views: for instance, members of the UK’s Universities Superannuation Scheme are currently running a petition demanding trustees undertake regular surveys of the scheme membership in order to establish a basis for incorporating members’ views into investment decisions.
Meanwhile, there are differences between public and private sector handling of member involvement. The vast majority of member engagement and action is in public plans. But there some are signs that more corporate funds are focusing on these issues. In the UK, the L&G Master Trust held its first AGM this year.
“In general, all that’s required is for a small, committed group of individuals running the scheme to turn their attention to these issues,” concludes Howarth. “I believe we’re going to see a lot of innovation in this area in the next year or two as schemes develop credible and imaginative ways to take their members’ views seriously