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Pensions 'must be more responsible' or face legislation

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  • Pensions 'must be more responsible' or face legislation

UK - MPs, trade unions and members of the pensions investment industry have jointly backed a series of responsible investment proposals to get pension funds to  "play their part" in creating a "sustainable financial system" or potentially face new regulation by 2010.

A statement signed by a number of signatories, including John McFall MP, chair of the Treasury Select Committee and Terry Rooney MP, chair of the Pensions Select Committee, claimed improved transparency and accountability of companies to shareholders "can be rendered meaningless" if investors are not motivated or required to act on information or ask "constructive" questions.

It stated: "Recent events have shown how the failure to hold corporate leaders to account for their decisions about risk can have a catastrophic effect on the financial system, the economy, the corporations themselves and ultimately on the well-being of members of pension schemes."

Brendan Barber, general secretary of the Trades Union Congress (TUC) and signatory to the statement, said: "As we start to rebuild our economy, it's absolutely vital that checks are put in place to prevent a repeat of this irresponsible behaviour. Committing to responsible ownership will help to ensure that investment decisions work in the long term and help rebuild a amore sustainable financial system," he added.

The statement warned "building an understanding of these risks into investment decision making and into engagement with firms is an essential responsibility of pension funds and the managers who invest funds on their behalf".

It claimed pension trustee boards "need to develop clear policies and guidance mandating their fund managers to engage in dialogue with companies, to vote at company AGMs and to report back on what impact their engagement has had", or if necessary it should delegate this responsibility to a third party.

As a result the joint statement outlined three next steps for pension funds:

Schemes should insert a 'do not harm' clause into their statement of investment principles (SIP) - requiring fund manages and other advisers to demonstrate investment decisions are not causing 'systemic harm' to the stability of the financial system; Institutional investors, particularly large pension funds, should sign up to the United Nations Principles of Responsible Investment (UN PRI) as soon as possible, and A collective reporting and monitoring body should be established - possibly as part of the Investment Governance Group (IGG) set up under the recent Myners Review - to ensure pension funds are adopting the 'do not harm' clause.

While these steps are voluntary at this stage, the statement warned "we believe the current crisis is of such magnitude that if satisfactory progress is not made on these points by the end of 2010, the government should consider action to make engaged investment, specifically in line with point one, a statutory responsibility for pension funds", and the group confirmed it had already written to the prime minister Gordon Brown to urge the government to back the proposals. 

Rooney pointed out people saving for retirement "want to know that their pension funds are being invested responsibly and for the long-term. The steps set out in this statement can work in the interest of savers, workers and companies themselves".

The group also said while there are legal obligations for trustees to invest primarily in regulated markets, and use derivatives only for minimising risk or efficient portfolio management, "it is clear that risks to schemes are bound up with risks to the system as a whole".

The statement added: "We therefore believe that there is a need for these obligations to be more clearly embedded in the principles and practice that inform investment decisions, and to include issues of systemic risk".

McFall continued: "The last few months have shown how we are all affected by the fallout from financial mismanagement and the volatility in the financial system. Getting things back on track means major investors playing an active role in the recovery - asking difficult questions of the companies they invest in about their corporate governance, social, environmental and other risks."

The other remaining signatories to the joint statement are: Will Hutton, chief executive (CEO) of the Work Foundation; David Pitt-Watson, founder of Hermes Stewardship Services; Catherine Howarth, executive director of FairPensions; Peter Webster, executive director of Ethical Investment Research Service (EIRIS); Alan MacDougall, managing director of Pensions Investment Research Consultants (PIRC); Colin Melvin, CEO of HERMES Equity Ownership Services; Matthew Taylor, CEO of the Royal Society for the encouragement of Arts, Manufactures and Commerce (RSA) and Ian Jones, head of responsible investment at CIS Asset Management.

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com

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