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Pension schemes to increase scrutiny over asset managers’ voting and engagements

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UK pension schemes are set to sharpen their focus of fund managers’ voting and engagements with investee companies, after a recent government taskforce highlighted the need to strengthen trustees’ voting rights.

UK pension schemes are set to sharpen their focus of fund managers’ voting and engagements with investee companies, after a recent government taskforce highlighted the need to strengthen trustees’ voting rights.

Last week, the Taskforce on Pension Scheme Voting Implementation (TPSVI) published a report outlining its recommendations for how to improve pension schemes’ ability to express their voting preferences.

TPSVI notes that the way pension funds are currently invested leads to a “de facto delegation of stewardship and voting by schemes to agents – principally asset managers.” 

Asset managers, who often manage pension funds in pooled funds with multiple investors, generally do not take pension schemes’ views on voting into account.

The taskforce, which is chaired by the former CEO of the UK Sustainable Investment and Finance Association, Simon Howard, reported that pension schemes should be encouraged to set their own voting policies.

Giving asset owners a louder say in voting is “necessary for better pension outcomes,” said Howard. 

“First; by boosting the owner’s voice and influence over their agents we can ensure that the whole system works to better guide investee companies,” says Howard.

“Second; we will let the people paying into pensions know that their views are being considered, boosting the support pensions saving will receive.”

TPSVI’s report recommends that investors in pooled funds, which have multiple investors, should have the right to make an “expression of wish” over voting. 

Taskforce member and head of Pension Investments at Scottish Widows, Maria Nazarova-Doyle, says it is “incredibly important for asset owners like us to have a voice when it comes to voting in pooled funds.” 

“Having voting guidelines or an expression of wish in place with managers allows asset owners to have an impact and ensure that their sustainability preferences are taken into account when asset managers undertake voting and engagement activities.”

Claire Jones, partner and head of Responsible Investment at Lane Clark & Peacock (LCP), welcomed the taskforce’s report. 

“One of the key messages coming through from the report is the importance of voting rights and how influential they are,” says Jones, noting the growing recognition that stewardship will be “vital” to ensuring the long-term sustainability of investment market performance, as well as meeting broader societal goals including limiting climate change and reaching net zero carbon emissions by 2050. 

“There’s going to be even more emphasis in future on asset owners’ use of voting and engagement powers, and this is only going to rise up the agenda.” 

For these aims to be realised, pension trustees “need to devote more time to voting.”

“What I think we need is greater awareness among pension scheme trustees of the influence that they have, and for them to put greater emphasis on voting, and spend more time in their meetings understanding how the managers are exercising their votes,” says Jones. “I’m not sure that this taskforce is going to achieve that.” 

While some of the larger pension schemes already recognise the importance of voting and have been frustrated by their lack of control, the “vast majority” are not very engaged with the topic of voting, notes Jones.

According to TPSVI’s consultation, only 31 per cent of asset owners currently set their own voting policies, while 41 per cent rely on their fund managers’ policy. 

Jones notes that many pension schemes currently prefer to delegate their voting to asset managers, as they expect asset managers to have greater expertise in determining the appropriate use of votes.

“I’m not sure we’ll necessarily see a very high proportion of pension scheme trustees wanting to specify particular principles in relation to certain voting issues. What we should be seeing more of, at least in the shorter term, is the oversight that asset owners provide of what the fund managers are doing,” says Jones.

Increased oversight is likely to include greater engagement with how the votes are being exercised and challenging the managers’ decisions where appropriate.

Investment consultants will have a role to play in making sure that trustees appreciate the importance of voting, and helping them to understand what the managers are doing on their behalf, says Jones. 

Voting considerations should also be made an important part of manager selection processes since it’s “better to make sure that you’re appointing managers that are broadly aligned with your priorities and investment beliefs than it is to start trying to influence a manager that isn’t well-aligned to change their practices,” says Jones.

For their part, asset managers must be “more transparent about what they’re doing, and potentially more willing to listen to feedback,” adds Jones. 

According to TPSVI’s report, many fund managers do not offer pension funds the ability to express their preferences for pooled funds. 

“When we’ve asked questions before about whether managers are able to offer split voting for pooled funds, it’s been an almost universal ‘No’,” says Jones. 

Operational issues over splitting votes, and the potential weakening of the manager’s voice when it comes to dealing with investee companies, are cited by asset managers as reasons not to give pension schemes a say over voting.

TPSVI recommends that pooled fund investors should be given the ability to set ‘expressions of wish’ over voting, even changing the law to allow this, if necessary.

Jones welcomes the TPSVI’s proposal to grant pension schemes the right to set an expression of wish, but recommends giving trustees “several years” to engage more with voting before taking a further step to mandate it.

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