The majority of UK pension funds rely on their fund managers in the area of shareholder engagement, according to a survey carried out by the Local Authority Pension Fund Forum (LAPFF).
The survey found that while 71% of pension funds comply with the Myners principle that all trustees should incorporate the principle of shareholder engagement in their fund manager mandates, only 13% of pension funds are in full compliance with the Institutional Shareholders’ Committee’s (ISC) statement of principles of intervention, evaluation and reporting.
It also found that 64% of the pension funds delegate all shareholder engagement activities on UK equities to their fund manager and that the majority of these have not met to consider compliance with the ISC principles.
John Saunders, chair of the LAPFF, says: “The results of this survey of pension fund and fund manager policies and practice on activism show that both sets of institutions are taking these matters seriously. The progress that has been made is encouraging but there is obviously a long way to go before the effective engagement we want to see is attained.”
So should we be concerned by scale of task? Saunders notes that “things have moved in a positive direction over the last two years”.
But he points out that “what is lacking is any guidance as to how to carry out the ISC principles; that’s where groups like LAPFF need to get involved. If we end up with some guidance when we have done the second part of the survey that will be a major step forward. So pension funds will see a way they can participate and want to participate. That’s the important thing. I presume they want to, but they can’t without guidelines.”
The second part of the survey will involve in-depth interviews of pension funds on ISC principles prior to the publication of the final report on best practice on shareholder engagement in the autumn.
Pension funds can intervene by going to the AGM or meeting the company director. Saunders is sceptical: “I think few trustees are going to do that.”
He explains that “if they are only going through the fund manager, which I suspect is a reality of life, then it is a question of making sure that the relationship is a quality relationship; that the fund managers are doing what they want them to do”.
If trustees are relying on fund managers to carry out the principles which they have adopted, how do they evaluate it? “If all they’re doing is reporting back and saying we voted on this, do the trustees find this useful or do they need more?” asks Saunders “Perhaps a little bit more discussion is necessary.”
Saunders reassures that “the majority of fund managers do abide by the ISC principles and 100% operating within LAPFF are intending to by October this year when they will be reviewed again, so there is a real recognition and commitment from the fund managers.”
So in view of the guidelines issue has Myners fallen short? Saunders says: “Doesn’t this sort of thing take time? After two years we’ve got almost 100% of fund managers adopting these principles within LAPFF, so that’s a pretty positive result. As to whether they are adopting the principles as the local authorities want them to, that’s the bit we don’t know; 30% are actively engaged via their fund managers.”
So how confident is Saunders that this can be improved upon? “In two years there have been a lot of positive steps,” he says. “Interest in this subject very high so one would assume that there is going to be more engagement than at present just as there is more now than a year ago. So I’m pretty confident.”
It has been suggested that the voluntary nature of the ISC principles is the reason for the low level of compliance relative to the level of compliance with the Myners principle on shareholder engagement.
So is guidance sufficient? Wouldn’t legislation to force compliance be more appropriate? “My personal view is that there has been enough progress to justify a voluntary system,” says Saunders. “LAPFF will discuss this after the results of the survey.”
Given the topicality of this issue, what about cooperation with other bodies? “I would like to see LAPFF cooperating with organisations like NAPF,” says Saunders.
“We will have own set of guidelines but the two should have a lot in common.”
It all comes down to relationships.