David Cranston, the new director of the UK’s National Association of Pension Funds (NAPF) knows about baptisms of fire.
A major general in the British Army in Bosnia during the conflict, Cranston recently found himself on a rather different front-line – heading up the NAPF through a defining moment for the organisation - the association’s advice to members to abstain from the shareholder vote at the AGM of Vodaphone Airtouch in protest at a £10m (e16m) bonus being paid to chief executive Chris Gent.
Cranston explains: “In terms of the Vodaphone Airtouch issue it was purely co-incidental that the voting issue service of the NAPF started making recommendations on July 1 and I happened to arrive on the first Monday of July.”
However, Cranston notes the issue of corporate governance is one that interests him greatly and was intrinsic to both his army life and former incarnations at Royal Bank of Scotland as head of group compliance and the UK’s Personal Investment Authority (PIA).
“I have had the opportunity to run several organisaaions where I’ve recognised the responsibility of doing so efficiently and effectively.
“Consequently, I am delighted that the NAPF is providing guidance on this sort of issue. The responsibility of voting is terribly important and this has been shown to be the case over a number of years.”
On the substance of the NAPF’s advice for member abstention from the Vodaphone vote, Cranston believes the organisation was spot on.
“We work on principles not personalities - researching issues and engaging with the companies – particularly if we come out with something that might be critical or controversial.
“In the Vodaphone case, we felt this wasn’t a bonus that was being paid on future performance and that was very important. He adds that the action was not antagonistic.
“We did not do this to make the news or be combative, we did it to contribute to better governance of companies. With the amount of money that pension schemes have invested in the UK, what we want is a thriving economy. If we can play a part in that through corporate governance we will.”
However, a number of UK pension funds went a step further – condemning outright the bonus by voting against the proposal. Cranston feels this was partly a result of heightened media interest and partly the expression of a previously unplumbed depth of feeling.
“The profile had been raised in this case and the company had been alerted to this and taken a number of steps to rectify and defuse the situation. The point was made that shareholders want to have a voice, particularly if companies are breaking basic principles and that came out at the AGM.
“The NAPF is very keen that an abstention is recognised to a much greater extent than it is at the moment.”
And while the Vodaphone AGM did not vote against the Gent bonus, Cranston believes things have changed: “Vodaphone came out with an apology saying ‘we got this wrong and we won’t be doing it again’ and Chris Gent did buy shares in the company with the bonus – which means that his holding is now linked to performance and that is the point we were making.
“Shareholders have realised they have a role to play in governance and companies now appreciate that there may well be opposition to something that in the past they may have felt they could slightly gloss over.”
And he notes that the Vodaphone protest was no flash in the pan. “We will go on speaking our mind, but it must be objective and well researched.”
‘What we want is a thriving economy. If we can play a part through corporate governance we will’
Cranston has also been thrust into discussion over the impending Myners review on pension fund investment and trustee responsibility – initiated in part by an appeal from Prime Minister Tony Blair that pension funds invest in more business start-ups. “We sat down with Paul Myners for a good two and a half hours and discussed the issues as we saw them and then agreed to further discussion.”
Cranston notes the technical focus of the talks. “The three things we explained were most important to us, is that trust law is the best legal framework for pensions provision and we would want to see that upheld. Secondly, we believe there should be no investment direction placed on trustees – as trustees take their responsibility seriously.
“Also there are a number of issues around which we feel could make investment in private equity slightly easier and the minimum funding requirement (MFR) is one of those.
He elaborates on the contentious issue of MFR. “What we have said is that MFR inhibits the way people are investing. “It was produced for a reason and we feel the reason is no longer valid.”
He does not, however, dismiss the principle behind the original MFR concept.“Yes, we do need an element of protection here, but you can do it other ways such as through a discontinuance fund or insolvency insurance. Is MFR serving the purpose it was introduced to do? If it can be revised it might remove some of the inhibitions pension funds have in investment terms.”
However, concerning the debate over private equity investment, Cranston points out a number of complex questions. “Firstly, are the venture capital vehicles right?
“What is the structure of the company and are there regulatory issues regarding pension fund partnership with venture capital? At the moment section 191 restricts the amount that can be invested. ”This, he says, means a blanket cannot be drawn over whether funds should or should not invest in venture capital.
“The primary role of trustees is to meet their liabilities and to ensure that assets are invested in a way to do this. There is a conservative element within that. However, we have seen moves that recognise there is an opportunity to invest in private equity and there are around five funds which have invested over £2bn in private equity in the UK .”
“Trustees will decide. If they are able to look at the returns from venture capital and if that is appropriate for them, then they might do it.”
Faced with the July introduction of the Statement of Investment Principles (SIP), UK trustees have also had to add this to their agenda, whilst being faced with pressure from lobbying groups to take a more pro-active ethical and environmental approach in their investments. Cranston flags this up as another fraught debate.
“What might be ethical to you might not be ethical to me and someone else would disagree entirely with the both of us. Companies clearly are run for maximum shareholder benefit and not for other things and what might be appropriate for one company may not be for another.”
He believes transparency is “relevant and important” but stresses the requirement to be objective. “What we would have a concern about is if interested groups or parties tried to either misunderstand what was being required and tried to influence companies to meet the aspirations of that view, rather than what might be more sensible in the wider context.
“We are saying there should be transparency in the SIP to say what the investment policy is, not that there must be ethical investment.”
And in the face of such complexity, Cranston says he recognises the work on trustees’ shoulders “There is a recognition now that trustees do need some training – and I guess that hasn’t always been the case. It seems that trustees when they are appointed now, are required, and want to, go through some training to make sure they are aware of their responsibilities.”
He eschews the need for over regulation though. “The difficulty with legislation that says all trustees should pass some kind of exam is that you run a huge risk of a lot of people saying they don’t have time to do the job and you will have schemes collapsing because they can’t find trustees to run them.
“If you don’t have any evidence that trustees under trust law have been getting it wrong, which there isn’t, then there doesn’t seem to be any need for it. “The proof of the pudding seems to be in the eating and the schemes have done pretty well over the last 10 years.”
Significantly, Cranston acknowledges that the concerns of UK pension funds are no longer idiosyncratic in today’s European environment.
“I would be surprised if we didn’t have closer co-operation with European bodies with the European Federation for Retirement Provision (EFRP) linking as a conduit for this.
“There is obviously going to be a continuing theme of what we are doing as a nation within the European context, in terms of the euro, etc. “We have good links with the EFRP and will build on these – and with other similar bodies in Europe.”
He points to the forthcoming European directive on supplementary pensions as a case in point: “There are still elements within that which don’t quite fit into the way we do our pension provision in terms of restriction in a number of areas and there will be more debate here.”
And he concedes that the reality of expanding investment and cross border tax issues will dictate a wider stance for the NAPF: “We will want to be part of that debate for our members and represent their views.”
“One of the issues, of course, is the fact that companies with global and certainly European offices want to have a slightly simpler tax and pensions regime and how you look at the home and host element of this is all linked in with the wider picture. We want to be part of that debate because we want to represent our members’ views.”