A new report released by London-based think-tank AccountAbility and the World Economic Forum claims that the financial community is failing “to meet the needs of the real owners of capital through its unwillingness and inability to consider material social and environmental factors in investment decisions”.
Legislation has gone some way to addressing this. In the UK, last year’s Pensions Act imposes on pension funds an obligation to disclose the degree to which they are engaging with social and environmental issues.
But the view of AccountAbility CEO Simon Zadek is that this is nothing like sufficient. “Pension funds have no obligation to interact with those people whose money they are managing.”
He adds: “In the same way that we see the corporate community reaching out to many different stakeholder groups to their business it is high time that pension fund trustees engaged directly with intended beneficiaries to understand their intrinsic interests.”
Zadek notes that there is a history of this with employee representatives. He adds: “All of the evidence suggests that employee representatives are in the main lacking in competence, lacking in confidence and are often outpaced by other trustees, by advisers and by pension fund executives.”
So there is a clear inconsistency in the industry. “While we have spent almost a decade looking at the corporate governance code, corporate governance is almost entirely lacking in the pension fund industry,” Zadek notes. “There is an extraordinary lack of disclosure of pension fund trustee deliberations as compared with the calls that they make on the organisations they invest in.”
Poor pension fund governance means poor pension fund performance. “Short-term maximisation through benchmarking doesn’t deliver long-term financial returns,” says Zadek. “Forget the word social, just concentrate on financial probity and the long-term financial return that are in the interests of pension fund holders. And if the trustees aren’t even delivering that then one has to challenge the basis on which they make decisions. It doesn’t make sense.”
Fund managers are unwilling
to offer long-term performance models, so the way incentives for fund managers are structured needs to change. Zadek notes: “As long as fund managers are incentivised on the basis of short-term commissions and short terms asset price movements why would they want to
suggest anything else to the
The more progressive asset managers say that this can be done but trustees have to take the risk of moving away from weekly and monthly benchmarks. “So by moving to more extended performance bases pension funds will encourage many more asset managers to the table with performance models that are suitable for pitching for that kind of mandate,” Zadek argues.
The solution may be more straightforward. “If the NAPF turned round and said that it will no longer give money to asset managers who incentivise their individual fund managers on a short-term basis, the world would change almost immediately. It would require building into the RFP that short-term incentives for fund managers was not acceptable which would shift the terms of the game.”
But the governance issues go much further. Just like companies they invest in the pension funds themselves may also be open to accusations of conflicting interests. “We also have plentiful examples of advisers to pension fund trustees who also represent fund managers, and although those are declared it also implies a certain kind of advice,” Zadek notes.
Zadek argues that the solution lies in voluntary corporate governance codes for pension funds. “This would be more agile and flexible and could be changed over time more effectively. Trustees and their executive officers in the UK argue that a lot of what we are proposing in the report can be achieved without regulation.”
qA requirement that trustees engage with intended beneficiaries;
qThat the competencies of trustees and the level of disclosure changes;
qThat incentives within the fund management business shift towards the long-term basis of measurement;
qThat the information that the business community is providing to the fund managers is more responsive to this shift of performance interest.