This blog sets out to explain and justify why the Trustees of our National Employers Savings Trust have chosen to continue with State Street as their lead investment manager and have made no public statement about State Street or its relationship to NEST.
State Street, the American investment bank that provides custodial services to the Royal Mail and Sainsburys and investment funds to Scottish Widows and NEST, has recently been fined £23m for theft by the Financial Conduct Authority. See here
If you are found to be stealing money as an FCA registered individual then not only are you going to face the only custodial role you will be facing is as a guest of HM prisons. Your chances of working in the UK financial services industry is limited by your criminal record. But if you are an investment bank, it is different. You pay some money and carry on.
There may be one or two readers who raise an eyebrow at this. Aren’t fiduciary duties absolute? Are their degrees of culpability in theft and is stealing from a pension fund a victimless crime? If $22m is stolen out of retirement and sovereign wealth funds set up (inter alia) to pay pensions to Sainsbury’s staff and Royal Mail postmen, might we not infer that the deficit arising would need to be paid for by customers through more expensive postage costs, and costlier aubergines?
But there are other considerations at work.
We should not forget that for NEST, the number one priority is not to rock the boat. They have set up an investment strategy for youngsters entering the pension system that provides them with a low growth fund for the first few years in the hope that youngsters will not opt out of saving like scalded frogs jumping out of a boiling pot of water. Were these same savers to discover (though NEST publicly censuring State Street) that their investment managers had been caught with the fingers in the till, frogs might jump. Turn the heat up on one – turn the heat up on all. Rock the State Street boat and your boat rolls with it.
And we should remember that it was only in last year’s accounts that NEST had to admit to being a victim to bank fraud itself. So for it to be associated with bank fraud again would not look well to its members, let along the tax payer and more specifically the DWP – who bankrolls NEST to the tune of c£400m
Besides which, State Street can argue that what goes on in its banking division has nothing to do with its asset management division, that all this happened a long time ago (well 2011) and though NEST and State Street were setting up their Investment Management Agreement in 2011, not much money was under State Street’s management (until more recently).
And we shouldn’t forget that if NEST had to blow the whistle on State Street then so would Scottish Widows, which would be uncomfortable for Lloyds Banking Group which is trying to release itself from the shackles of state ownership (and deliver some needed funds back to the Treasury).
And then of course there is the reputational damage to the trustees and the governance process of NEST. It would not be good for their reputation for it to be revealed that this fraud happened on their watch, that the fraud was not exposed by them, nor indeed by the FCA but by Inalytics, an independent third party. Frankly this would not say much for the governance process in play at many UK occupational Schemes.
And finally, we should not forget the great prestige brought to Britain by having State Street in their wonderful tower in Canary Wharf and how much it means to the City to have them, JP Morgan , Bank of New York and Citibank looking after our money. Infact the FCA can enjoy the experience of dining and drinking with the very people they are fining as their offices are virtually next door to State Street’s. It is small wonder that London has become the place for global banks to do business, nowhere is financial crime better accommodated.
Considering all the evidence, it is clear to the trustees of NEST that it is in nobody’s interest that State Street be censured, let alone be fired, from their position as the lead investment manager of NEST funds.
The burdens of trusteeship are many and we should be grateful that faced with this difficult decision, they have decided to sweep it under the carpet.
Sunlight might be the best disinfectant but in the murky world of UK financial services, a little disinfectant might do more harm than good.
So if you’ve got this far, I’d ask you to forget what you have just read, it’s not good for you, for Nest, for the DWP and Treasury and most of all it’s not to be repeated.
Mum’s the word eh!