Pension plans have had mixed experiences of their passive fund managers’ ability to meet their stewardship goals over the past three years, according to a survey.

Half of the respondents said the fund managers had been able to do so either to a ‘small’ extent or ‘not at all’, with 23% indicating the former and 27% the latter. Just shy of one-third (31%) said they had been able to achieve the pension plan’s stewardship goals to a ‘medium’ extent, and 19% said they had been able to do so to a ‘large’ extent.

Part of a research programme between asset manager DWS and consultancy CREATE-Research, the survey involved 120 pension plans in 20 countries, with combined assets under management of €2.2trn.

It sought their views on stewardship as applied to index funds against the backdrop of a debate about the extent they were “lazy owners of companies” or “the ultimate long-term investors”.

“Unsurprisingly, so far, the debate has been dominated by active and passive asset managers or academics supporting either camp,” said Amin Rajan, CEO of CREATE-Research and author of the report.

“It is time to widen the scope of the debate by soliciting the views of the biggest users of passive investment vehicles: pension plans”

Amin Rajan, CEO of CREATE-Research

“But as ever, the reality is far more nuanced. Nothing is black and white. It is time to widen the scope of the debate by soliciting the views of the biggest users of passive investment vehicles: pension plans.”

The majority (66%) of the respondents indicated they were at an ‘already mature’ stage of passive investing. Eighty per cent said their stewardship demands on their passive fund managers would increase over the next three years.

Constraints on progress’ 

According to the survey report, which also incorporated findings from structured interviews with executives at some of the pension schemes, stewardship by passive funds was “getting more muscular”, but there were barriers to progress.

The top three factors given as “constraining [your] passive fund managers from fulfilling their stewardship role most effectively” were: “unaccountable proxy voting advisors are too powerful” (64%), a lack of clear metrics of successful engagement (62%), and there being too many companies in indices in global financial markets (60%).

“Apart from big splashes, for many it remains unclear as to how engagement is actually done and what it delivers,” said Rajan.

The participating pension plans were also asked about stewardship as a factor in manager selection, with more than half (56%) indicating they took account of a manager’s capacity and track record to a ‘large’ extent, and 27% to a ‘medium’ extent. Ten per cent took this into account to a ‘small’ extent and 7% not at all.

According to the report, the main reason “behind these numbers” was the need to improve the quality of beta, as passive funds were increasingly dominating pension plans’ core portfolio.

Another reason for paying attention to a manager’s track record on stewardship in selection was “intensifying bottom-up pressures from pension plan members”.

Rajan linked this to the UN Sustainable Development Goals, saying that as countries had become more aware of them, “members want their plans to not only adopt an activist stance but also provide tangible evidence that it delivers positive results”.

DWS sponsored the survey report but “without influencing its findings in any way,” noted Rajan. The report can be found here.

An account of the research by Amin Rajan and DWS can be read in the July/August issue of IPE magazine here