Hold Investment Managers to Account for Delivering Good Returns

23 July 2012 (PLANSPONSOREurope.com) - UK plan sponsors’ pension funds need to hold investment managers to account for delivering good returns not least because failure to do so could affect plan sponsor’s ability to maintain their plans, according to Malcolm McLean, consultant at Barnett Waddingham.

Segars’ comments follow today’s publication of Professor John Kay’s Final Report of his independent review to examine investment in UK equity markets and its impact on the long-term performance and governance of UK quoted companies.

His recommendations, which are aimed at key players in UK equity markets, as well as government and regulators, look to:
• Improve the incentives and quality of engagement, including establishing an Investor Forum to foster more effective collective engagement by investors with UK companies;
• Restore relationships of trust and confidence in the investment chain, including by applying fiduciary standards more widely within the investment chain;
• Change the culture of market participants, including by adoption of ‘good practice statements’ by company directors, asset managers and asset holders that promote a more expansive form of stewardship and long-term decisionmaking throughout the investment chain; and
• Realign incentives by better relating directors’ remuneration to long-term sustainable business performance and better aligning asset managers’ remuneration to the interests of their clients.

Joanne Segars, chief executive of the National Association of Pension Funds (NAPF), said: “This report offers some useful, practical ways forward. Equity markets must work more effectively in the long-term interests of investors and savers, who need to be able to see that they are getting value for money.

“The NAPF is pleased to see Kay say that transaction costs and stock lending income should be set out more clearly. Boardroom pay must also become more transparent and more strongly linked to long-term performance.
“Most pension funds delegate responsibility for company engagement to an investment manager, and Kay is right that this relationship needs to be reshaped if good corporate governance is to develop further.

“Pension funds need to hold their managers accountable for delivering long-term returns, and quality stewardship should be a key factor when picking or reviewing investment managers. However, at present there are many competing priorities for trustees, and managers’ capabilities are difficult to assess.

“Our members regularly engage with companies on routine and more serious matters. This approach fits well with Kay’s suggestion of a forum to encourage collaboration among domestic and overseas investors, and it’s something funds will be keen to get involved in.

 “We strongly support the FRC’s Stewardship Code and welcome the new best practice statements for asset owners. These could encourage pension funds to be more explicit in their expectations of their asset managers and more rigorous in holding them to account. We plan to incorporate the relevant parts of the statements into our Corporate Governance and Voting Policy and Guidance on the application of the Stewardship Code.”

Malcolm McLean consultant at Barnett Waddingham, told PLANSPONSOR Europe: “As we see from the debate about fees and charges, there is a good deal of concern about investment returns and value for money and I support the NAPF completely in what they are saying. People should be held to account for what they are doing to the maximum extent possible – obviously there are some in this area.

“In terms of pension schemes the returns are not being delivered in the way they should be, and that ultimately has an impact on the plan sponsor’s ability to maintain the pension scheme at a level it should be and it will cost them money.”

PLANSPONSOREurope Staff
editors@plansponsoreurope.com