UK pensions industry aims for more say over managed assets

Where pension schemes invest in pooled funds, votes on shares held in the fund, for example, will typically be exercised by a custodian or asset manager as single block votes. This makes it difficult for schemes to reflect their own and members’ preferences on issues like climate risk management and boardroom diversity.

The Taskforce on Pension Scheme Voting Implementation (TPSVI), chaired by former UK Sustainable Investment and Finance Association chief executive Simon Howard, was set up by pensions minister Guy Opperman to look into voting system issues. It has made 24 recommendations around the voting of equity shares by occupational pension schemes and asset management practices which include requiring managers of pooled funds to follow the asset owner’s ‘expression of wish’ as to how votes are exercised.

Pensions expert Carolyn Saunders of Pinsent Masons, the law firm behind Out-Law, said that the report’s conclusions mean that there will, in many cases, be a “gap” between what pension scheme members might want or expect from their investments and what trustees are able to achieve.

“The report highlights the increasing influence of voting on the way in which companies are run, whilst illustrating the difficulties that most schemes experience in actioning their voting preferences,” she said. “This difference between what may be expected of trustees and what they can realistically achieve creates risks which trustees need to manage.”

“The findings in the report should lead trustees to check that their governance around voting is as robust as it can be in all the circumstances. Meanwhile, trustees can help the industry to self-regulate by creating a demand for this,” she said.

The report recommends the introduction of a requirement for pension schemes that choose not to set their own voting policy, to explicitly accept responsibility for the voting policies that asset managers implement on their behalf. This would be done by way of the scheme’s statement of investment principles (SIP), which should set out the relevant asset managers’ policies on at least three topics which the trustees believe to be most significant to members’ best interests. Performance of actual voting against policy on these topics would then be reported back to members through the scheme’s annual implementation statement.

Asset managers should offer investors in pooled funds, including pension scheme trustees, the opportunity to set an ‘expression of wish’ in respect of the fund, at no additional cost beyond the marginal cost of putting the individual policy in place. Asset managers and trade bodies should also commit to answering all reasonable requests from clients on their voting and stewardship activity.

Investment funds expert Elizabeth Budd of Pinsent Masons said: “This is a further example of how regulators want investment managers to actively engage with investors and investee companies and introduce more rigour and transparency into their processes. Merely adhering to the Stewardship Code will not be sufficient, for example – investment managers must be prepared to provide easy access to their policies and respond to reasonable queries from investors. Where the exercise of voting rights may currently only be a short clause in agreements, the report proposes that voting is clearly seen as an important aspect of the manager-client relationship”.

The report also makes a number of supplementary recommendations to the government, and to regulators including the Financial Conduct Authority (FCA) and Pensions Regulator (TPR), as well as to the Occupational Pensions Stewardship Council. It also suggests, should voluntary expressions of wish not deliver the change it seeks, that the Law Commission review the law in this area with a view to proposing new structures that give asset owners the necessary voting rights.

The taskforce makes the additional point that the governance and execution processes for stewardship of assets and exercising votes may be very different depending on the legal form that the particular pension scheme takes. In doing so, it reflects points made by the Law Commission in its 2014 report on fiduciary duty, in which the Commission concluded that it is inappropriate that member protection is stronger in trust-based schemes than in contract-based schemes. The taskforce’s ultimate aim is a move towards standardisation. “Objectively a vote and the consideration of it should be the same whatever the legal form of pension scheme on behalf of which it is cast,” it said.