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Pension funds to soak up £120m fine for Thames Water [updated]

Four of Europe’s biggest pension funds will foot the bill after a UK water company was hit with a £120m (€136m) fine.

UK water regulator Ofwat this week fined Thames Water for failing to reduce the level of leaks in its pipe system.

The decision has landed its shareholders – which include Dutch civil service scheme ABP, healthcare sector fund PFZW, the BT Pension Scheme and the UK’s University Superannuation Scheme (USS) – with a portion of the bill.

Under the terms of the penalty imposed by the regulator, Thames Water will pay back £65m to customers in addition to an automatic £55m levy for “missing the commitment it made to customers to cut leaks”, Ofwat said. In total the fines reach £120m, all of which will be “borne by shareholders”, according to the regulator.

A spokesman for PGGM, PFZW’s asset manager, said it had been engaged with Thames Water regarding its 2% stake in the utility group, focusing on “network management and reduction of leakages”.

“Company management is working with shareholders to execute an improvement programme to diminish the amount of leakages, which means considerable investments are needed,” the spokesman added. “As a shareholder PGGM accepts the agreed compensation for the clients of Thames Water.”

Last year, USS bought an 11% holding of Kemble Water Holdings, the parent company of Thames Water Utilities, which is the UK’s biggest water company.

At the time, Michael Powell, head of private markets group at USS Investment Management, said he looked forward to “developing a long-term relationship with the management team [of Thames Water] and continuing to strengthen our relationship with Ofwat and other stakeholders”.

The BT Pension Scheme took a 13% stake in Thames Water in 2012, which had subsequently been reduced to 8.7% by May this year, according to information published by Ofwat. Hermes Investment Management, the BT scheme’s in-house asset manager, is also a shareholder.

Other major Kemble Water shareholders that also face paying a proportion of the bill include Infinity Investments, a wholly owned subsidiary of the $828bn (€600bn) Abu Dhabi Investment Authority, and Canadian pension fund investors British Columbia Investment Management Corporation and the Ontario Municipal Employees’ Retirement System.

In total, Thames Water is owned by 11 shareholders, a large majority of which are pension funds with long-term investment horizons, a spokesperson for Thames Water said. The shareholders would “help pay and share the cost, rather than be it borne by customers”, the company added. 

Ofwat moved to impose the fine following Thames Water’s failure “in tackling leakage”.

“The measures we’ve announced today illustrate the scale of the company’s shortcomings and how seriously we take them,” said Rachel Fletcher, CEO of Ofwat.

“High leakage creates unnecessary strain on the environment, excess costs for customers and increased risk of water shortages. A well-run water company will have a good understanding of the condition of its pipes and will be able to reduce leakage over time.”

In a statement yesterday Steve Robertson, Thames Water CEO, admitted that the group’s recent performance “has not been good enough”.

“We have taken more control of how we manage the network and are investing significantly more in people and resources to tackle leakage, get back on track and then go beyond,” he said. “Thanks to these changes already in place, our current leakage repair performance is our best ever at around 1,000 a week. Our focus is to restore customers’ trust and confidence in Thames Water.”

USS declined to comment. APG, which manages the assets of ABP, did not respond to a request for comment.

This story was updated to include a statement from PGGM.

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