The Taskforce on Pension Scheme Voting Implementation has called on the Department for Work and Pensions and the Financial Conduct Authority to create templates and requirements aimed at boosting asset owners’ ability to vote, especially in pooled funds.
The task force was set up in December last year to address problems in the voting of equity shares by pension schemes, with the aim to encourage more and better-quality voting by these asset owners, in part by encouraging them to set voting policies.
It was also intended to recommend behavioural changes that would be required from service providers.
In its report, published on Monday, the task force said it does not envisage pension schemes instructing votes on particular motions, but rather thematically, by “saying how they would like their votes cast in respect of particular topics and themes”.
I see no reason why trustees shouldn’t be able to determine their own high-level policies – on areas such as climate risk management, diversity, or pay – and find an asset manager to implement it
Guy Opperman
Increased turnout at votes and scrutiny on the decisions being made, especially on questions of climate risk management, diversity, or pay, make it essential that voting systems are fit for purpose, the report stated.
“These trends are putting pressure on the current system of de facto delegation of stewardship and voting by schemes to agents — principally asset managers. We are in a position where the trustees of pension schemes feel they are being called on to do more while beginning to sense that their agents are not supporting them adequately and are not giving them the data necessary to review their performance,” it said.
“There is a gap between demand from clients — which needs to grow further — and supply from the industry.”
Difficulties to overcome
There are barriers to expanding pension scheme voting, however. These include complexity in pension and investment structures, complexity in how voting is delivered, and issues with splitting the vote in pooled funds.
Some of the complexity arises from the different types of pension scheme and the different legal structures surrounding them, while asset managers, most of whom outsource some or all of their voting activity to boost efficiency, are also an obstacle.
Inadequate IT systems are likewise challenging to overcome.
“Our interviews with stakeholders have left us in no doubt that there are things owners and the responsible staff in asset managers would like to do in terms of voting and disclosure, which they cannot because of inadequate systems,” the report stated.
Pooled funds pose a particular issue, it continued. Though ‘expressions of wish’ can be made by asset owners to the management of pooled funds, asking them to vote in a certain way on a certain issue, these are generally refused.
“However, despite […] objections we are aware that several pension funds have been offered pooled fund split voting services on some or all of their investments and split voting is routinely taking place,” the report stated.
“It is therefore disappointing that the asset management industry has routinely and publicly denied what is happening on a day-to-day basis.”
It continued: “We do not underestimate the potential operational issues associated with split voting in pooled funds at scale. However, considerable time and effort would have been saved if the issues had been more openly discussed and the issues addressed.”
DWP called to create voting template
The task force stopped short of calling for asset managers to be forced to draw up their own detailed voting policies, though the report stated that it would be “very desirable” for them to choose to do so should they have the required resources.
However, it did “recommend to the DWP that if a scheme does not set its own policy, it be obliged to accept responsibility for the policies carried out on its behalf”.
“We recommend that schemes report as appropriate on differences between their own policy and that of their fund manager(s), or on differences between the polices of their various fund managers,” it said.
In addition, it called on the DWP to promote voting “through all aspects of its work”, and on either the DWP or the Pensions Regulator to provide guidance on “what good quality voting policies look like”.
"We recommend that investment advisers and consultants be regulated as recommended by the [Competition and Markets Authority]. From our perspective, this regulation should focus on disclosure of how they resource and undertake work related to stewardship and voting,” the report continued.
Investment consultants should flag the importance of voting and these policies when giving advice, while the Financial Reporting Council should “consider increasing the profile of voting as a distinct activity in stewardship as it reviews the effect of the 2020 code”, the task force said.
It added that expressions of wish should be encouraged in pooled funds, though they are not expected to be “extremely precise”, and should rather be seen as “a tool whereby instructions at the strategic and policy level can be set”.
“If service providers are as client-centric as they often claim, they will facilitate it.”
On the issue of vote reporting and monitoring, the DWP should “encourage more and better reporting by schemes and should promote a vote disclosure reporting template”, while the FCA should set expectations in handbook guidance of fuller disclosure on vote rationales”, the report stated.
It also called on the FCA to “carry out a review of manager use of the easement in respect of not reporting ‘insignificant’ votes”, to “assess whether manager voting polices help or hinder scheme investment decisions”, as well as setting out “in handbook guidance a key set of aggregate data which managers should be required to report”.
“The priority at all times should be to ensure open standards, consistent with both the UK government and FCA principles on the benefit of data interoperability to empower customers and ensure fair competition,” it said, and that the DWP, the FCA and TPR should “monitor the delivery of data at fund and mandate level and intervene if it is too slow”.
Experts cite stewardship as more important than investment choices
A majority of leading pension figures believes that effective stewardship is more influential in tackling environmental, social and governance issues than in what is being invested, according to participants at a Law Debenture event.
Guy Opperman, minister for pensions and financial inclusion, noted that voting rights “is about giving pension savers a voice in how their hard-earned savings are being looked after”.
He said: “I see no reason why trustees shouldn’t be able to determine their own high-level policies — on areas such as climate risk management, diversity, or pay — and find an asset manager to implement it.”
Simon Howard, chair of the task force, added: “Our recommendations will give asset owners, such as pension schemes, a louder say in voting in pensions.
“There are two principal goals. 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.
“Second, we will let the people paying into pensions know that their views are being considered, boosting the support pensions saving will receive. Both are necessary for better pension outcomes."
