Transcript of the speech given by Simon Howard, chair of TPSVI, at the launch of the Taskforce at the AMNT’s 10th Anniversary event.
Good morning everyone.
I am delighted to have been asked by the minister for pensions to chair the Taskforce on Pension Scheme Voting Implementation. He has explained why it is systemically important and I want to echo his thinking.
I am very happy to be working with and on behalf of trustees. Wearing a variety of hats, I have now met hundreds of pensions fund trustees, and I know that what we have with trustees- and what the AMNT has in abundance, is integrity, common-sense, and a desire to do their best. And that is why when AMNT members who are informed, sharp and are doing the job on a voluntary basis with no axe to grind have complained to me about financial services firms I felt uneasy. I soon realised the odds were heavily that the trustee was in the right. And one topic I was extremely uncomfortable about was trustees setting voting policy. It seems blindingly obvious to me that the wishes of the asset owner must be considered in voting the shares. And indeed, if push comes to shove, what the owner wants should be the only factor.
When I have asked why this shouldn’t be, I have never heard a satisfactory answer. As with the minister, Technology, the importance of speaking with one voice, and legal structure were mentioned. But having read the Clacher report and the recent Law Commission report I share the Minister’s scepticism. So, I think the argument is right- owners should be able to direct voting, and I think there are no insuperable problems. I am starting from the position stated in the taskforce name- we are implementing what is to be done. We are not debating.
Our aim will be to reach a consensus across the voting chain on various issues, and I think that consensus can be reached. In particular, on the trustees setting the voting policy it will be reached because of two marvelous British inventions: fiduciary duty and “comply or explain”. I don’t think there is much doubt now that pension fiduciaries have a duty to consider how their assets are voted, so what trustees want and what the pension system needs in order to deliver the benefits the minister referred to, is for trustees to have a policy and to set guidelines- which are then acted on.
This Taskforce is not going to set those guidelines, that may be a job for the Council of UK Pension Schemes suggested last week, but clearly for the guidelines to be effective in lifting standards they need to be set at an adequate level and across a range of issues relevant to growing and preserving value- climate, diversity, integrity in pay. I think trustees will set guidelines at the level of best practice and will say to their agents make sure our votes are cast in accordance with these instructions. Not requests – instructions. But they will go further. They will say to, for instance their fund managers, “We are not expert- you are. We have set the strategy, you implement it. If on anything at all you think we should vote contrary to these instructions vote that way but tell us you’ve done it and tell us why you did”. Yes, it’s “comply or explain”, the second proven, understood practice which will make this possible.
So, the industry should be able to adapt. Trustees will give instructions. If those instructions are to act in accord with best practice, and if fund managers and voting advisory firms also intend to deliver best practice then there is alignment.
If anyone can tell me why that cannot work, please do so. I hope the consensus on the principle of trustees setting policies will form very soon.
I am not sure we need a consensus on how long it should take for agents to be able to accept instructions. When the fund managers and service providers make their stewardship code reports the market will soon see who has the flexibility, managerial skill and client focus necessary; conversely the red flags will go up over those that don’t- just how good are their systems? How focused is the management? Do they even understand what their clients are required to do? Now, the taskforce will need to consider the issue of split voting on pooled funds and what we do about getting that implemented. This is the issue Clacher looked at and which the Law Commission considered in passing.
To sum up, what the minister said, no game-changing impediment has been found.
There may be problems in individual firms in the voting chain, but I am sure no one is suggesting we hold back progress at the industry level just for that. Finance has adapted to bigger challenges and it will adapt to this one. We recognise split voting may give problems to some firms and we are sympathetic to the pain in operational areas that will result from this extension in client needs. I think clients will be too, if they see adaptation underway, they will stay, if they see resistance who knows?
But as some – perhaps many? – service providers will realise things are already stirring and we may already be seeing a coalition of the willing emerge. Split voting is happening. There are many excellent nuggets in professor Clatcher’s report. One is this: “The barriers aren’t legal or technical, it is just a willingness to do it …one asset manager made a concession fairly early on, and we could direct our UK voting.” That’s a quote from the head of governance at a large pension fund. And that confirms what isn’t a secret anymore: fund managers can split the vote and will for some clients. It can be done, and it is done. It is confirmed in the recent Law Commission report: “For example, we have been told that it is practically difficult, although not impossible, to enable “split voting” on a pooled fund”
In fact, split voting seems to be cropping up everywhere. The Friends Provident Foundation recently ran an RFP for a £33m mandate and four of the bidders offered split voting. There are many pension funds with that quantum of equities in pooled funds- split voting at the scale of many hundred small pension schemes is already available. Further up the size range, NEST was able to instruct voting in a pooled fund before moving to a segregated mandate; many in the sector are aware of other large funds that can get their wishes executed in pooled funds – Minerva for instance is working with funds to get bespoke voting polices agreed with their fund managers. And in the short period of time, I have been looking at the issue again I have been told of two institutional scale new products being planned. And there are significant developments in more retail orientated areas. Tumelo is developing a product that lets investors tell their fund manager how they would like them to vote. It is opinion polling but the recognition of the owner’s interest is interesting. Citizen Shareholders is developing a product that would instruct fund managers on how to vote savers’ shares.
So, it may be that pooled fund voting is here but that it is not being talked about. Perhaps the consensus in this area is that people recognise that that needs to change.
I look forward to helping the significant developments in pension fund voting that are imminent take place. I’d like to salute Janice Turner and her AMNT colleagues especially Leanne Clements and David Weeks for the role they have played in bringing it about, and I’d like to congratulate Iain Clacher on his report. In particular, I would thank the Minister for kicking this important work off.
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