A shocking lack of care. How AE providers invest our money.

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A shocking lack of care

Share Action has released this morning its findings into the care taken by leading master trusts and contract-based providers investing our money.

The report called “Reclaiming Ownership” makes shocking reading. Of the 11 providers surveyed, none even got to 4 out of 10. One provider didn’t get to 1/2 out of 10 and the great hope of the Government – the standard setter-NEST – scored less than 3 out of 10.

The phrase “could do better” doesn’t apply. The survey shows that despite the world turning its attention to better governance, transparency, climate change, human rights, labour rights, corporate tax-paying, executive remuneration, arms policy, extraction of minerals and power generation….Britain’s great long-term investment institutions are woefully behind the curve.

I shared these findings yesterday with a close friend whose texted response I will publish in full

What is this communist nonsense?

Seems obsessed by climate change – it seems to be on every page

On basis of what I’ve read I would invest in the bottom fund and never invest in the top rated one!

He/she remains a friend; this attitude will probably resonate with the vast majority of people in pensions who still think that the less attention paid to ephemera like ESG, the greater the return to the investor.

Not only is this belief wrong in itself, it is indicative of how out of step we have become with a wider world which has moved on. The Paris Treaty signed last December is not just a piece of paper, it makes a material difference to the way that industry works and that includes the pension industry.


 

But to the report

The report is long and immensely diligent. It is not an easy read but I have read it all. If you want to read it yourself, here is the link.

There is an executive summary on pages 3-5 which is succinct and makes the main points needed. The output of the report that people will pick up on is the overall league table of scores.

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Does this make sense?

Despite being on Share Action’s “panel of experts”, I had no part in the research or the writing of the report and I have not commented to Share Action other than to send them some stuff on ownership published by L&G which shows it is thinking of getting better.

But the report is remarkable in tallying with the investment rankings on www.pensionplaypen.com , which are created by First Actuarial which has (other than through me) no inter-action with Share Action whatsoever.

The People’s Pension should be particularly aware that not only does it come bottom of the Share Action rankings, but it comes pretty close to bottom on Pension PlayPen’s investment ranking. For all its superiority in terms of inter-operability with payroll and its success in getting new business, People’s Pension and its parent B&CE remains, in our opinion, a train crash when it comes to the investment of its member’s money.

I have written consistently about the failings of People’s to properly consider the governance of its investment policy. The recent appointment of State Street Global Advisers – actually increases our concern about the lack of ownership of this problem.

If People’s should look to their mettle, so should its principal rivals in the Master Trust sector – NEST and NOW pensions. Both have been smug about their investment governance and though both are considerably better than The People’s Pension, neither have got anything to crow about. While you have to leaf through to pages 58-9 of the report to find the problems, I hope that Otto Thorenson and Nigel Waterson are paying attention.

The big theme

If there is one theme that runs through the report it is that there is insufficient ownership of the way monies are invested and assets invested into are monitored and managed. Only NOW of the providers surveyed directly involves itself in the process, all other providers delegate the investment to third parties, even if those third parties (for Aviva, L&G and Standard Life) are part of the group. Both Aviva and Standard Life’s investment arms themselves delegate much of the fund management to others so the levels of accountability for what is going on is so diluted that Trustees or IGCs have difficulty knowing what is going on and who is responsible for it.

This shocking abnegation of control, responsibility and accountability is present even with NEST who are shown to have virtually no strategy as regards the record of invested companies in Remuneration policy, Power Generation, Arms, Deforestation, Extractive Industries …I could go on.

Why this matters

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Talk to your kids, they are more aware of these issues than you , care more about them than you and they are the people for whom auto-enrolment and long-term savings really matters. You may be like my friend and mock all this stuff, but your kids may not find you funny (just as I don’t find my friend funny – at least on this).

The world is changing, it has to or else it will deteriorate fast. Investment management is not changing as fast as it should and that is largely because those entrusted with managing assets are not engaging with the key issues associated with governance outlined in this report.

It matters to Share Action and it matters to me and my family as investors. It matters to a consultancy like First Actuarial who downgrade organisations like People’s Pension for its pathetic lack of engagement in any of this. It matters to Pension PlayPen whose scores reflect the findings of Share Action’s reports.

Ultimately, it is only when people who have influence over how other people think, those in senior positions in the management of providers, on the IGCs and trustee boards that oversee those managers take notice and take action- THAT THINGS WILL CHANGE.

So if you are one of those people, read this report, this may not matter to you directly but you have the stewardship .

And if you are not one of those people, but someone whose money is invested in the funds of these big pension providers, then this matters to you directly. You have every  right to be angry at the lack of action of your stewards and you should be demanding better.

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About henry tapper

Founder of the Pension PlayPen, Director of First Actuarial, partner of Stella, father of Olly . I am the Pension Plowman
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4 Responses to A shocking lack of care. How AE providers invest our money.

  1. Phil Castle says:

    I sent the below to NEST in May 2013.
    Dear NEST,

    Open Letter to NEST and to the trade Press

    Thank you very much for your entertaining seminar last Tuesday. I did find it very informative and it has helped me better understand where NEST can play a part for both my employer clients with existing Group Pensions and those which do not have any provision yet.

    The explanation as to why your default funds for the younger generation are lower equity than an adviser might often suggest are actually plausible where NO advice and no adviser is involved on an ongoing basis. I anticipate this could become quite common with NEST, whereas with hybrid NEST/Insured advised schemes run in tandem, it is likely the staff member will be more engaged by the advice and less likely to “opt out” if markets fall where an adviser is involved than where not.

    Two issues I do wish to highlight and that is;

    1. Just as with pensions themselves, the fact that pension unlocking before age 50 was difficult, protected the elderly from their younger selves. By NEST not allowing transfers out, the protection from the pre age 55 “Pensions Liberation” vultures can be maintained without additional legislation if NEST is used for all plans where an employee does not seek or receive advice. Where an adviser is involved, the fact that transfers out of PPPs are allowed with a potential for abuse of QROPs and “liberation Schemes”, the onus will rightly be on the adviser to provide suitable advice and be prepared to stand by it. This can and should be policed by both the FCA and advisers ourselves by ensuring the FCA is made aware of firms targeting pension liberation to the mass market. That is NOT to say that there may not be occasions where accessing pension earlier and suffering a horrendous charge may not be sensible. I for instance have a client who is aged 48 and whose life expectancy is probably about age 58 and arguably for him I could see a reason for him to aim to take his benefits before 55 and suffer the tax charge, but this is a real exception to the rule. So my point is, PLEASE don’t allow pressure to be put on you to allow transfers out of NEST as it is a worthwhile protection until other more appropriate legislation can be brought in to protect the vulnerable whether it be NEST members or PPP members.

    2. My next comment and the attachments should be forwarded to Mark Fawcett who I gave somewhat of an uncomfortable questioning on Tuesday as to the failure of NEST to commit to a default options compliant with the UN’s Global Compact, rather than individuals having to choose an “Ethical” or “Sharia Compliant” Fund which in many cases as he confirmed himself (and I agree) may be more restrictive than the individual feels necessary.

    The details of the UN Global Compact, (unlike the UN Coroprate Governance issues that Mark showed he was aware of in his reply to me) are really just a commitment that all European and Global firms abiding by the key points of international law and by restricting investments to those companies signed up to the Global Compact, a default fund is simply applying UK and EU law to investments made abroad. Most Ethical or SRI investors would I suspect view the UN Global Compact as pretty wishy washy, but I don’t think many fair minded people could put there hand on their heart and say they actively want to invest in companies who will not commit to these basics. Hence why I think NEST should.

    I would challenge NEST to put the UN Global compact in front of all it’s members to see how many of them already think all UK fund managers would NEVER invest in the areas excluded. I would contend that a very significant proportion, if the issues are explained correctly, would opt to place this restriction on the investments Mark oversees at NEST, hence why the default should be this.

    As I tried to explain (but not very well I am afraid) the Vanguard SRI funds only avoid firms not signed up to the compact

    As you can see from Vanguard’s fund fact sheets this restriction does not reduce the investment universe to any great extent. On the European side that’s about 6% excluded and globally less than 12% excluded leaving ample for Mark’s team to choose from.

    As NEST have recognised the need from launch not to exclude those with Ethical or Sharia concerns (like we did when we first started providing Group Scheme advice in 1998 by ONLY recommending providers who offered an Ethical option where the staff research had indicated there were staff already there with strong beliefs) NEST could set an example initially with the passive funds by making them subject to the UN Global Compact Filter….. I believe (I may be wrong) NEST’s Sharia fund is a passive/index tracker. NEST could go further and commit to ALL their funds only investing on this basis too perhaps and I think there is an argument for doing so. Why I was so vociferous at Tiesday’s NEST live seminar is that I simply cannot understand why NEST have not considered this yet. These are basic issues of illegal activities occurring abroad being invested legally in the UK without the knowledge of those investing as no one is telling consumers they may be investing in these things simply because no-one has bothered to check the UN list!

    It’s a bit like the weapons of mass destruction in Iraq, but in reverse. There we were told they had them, so we were bullied in to invading a sovereign state by lies which resulted in destabilisation of the whole Arab world. The Afghan war might have been over by now, had the lies not been perpetuated and yet now we have seen a war there for twice that taken to fight World War 2! With Investments, we are not told that our money could be funding the very things we sent our troops out to deal with!

    Kind regards

    Phil Castle
    Financial Escape Ltd

  2. Phil Castle says:

    Sent: 20 May 2013 17:06
    To: Phil Castle
    Cc: Porter, Roy
    Subject: Re: NEST Live and the UN Global Compact

    Dear Mr Castle

    Re: NEST Live and the UN Global Compact

    Thank you for your comments and interest on NEST’s approach to ethical investing and in particular your thoughts on the UN Global Compact.
    NEST has not pursued an approach that excludes investments noncompliant with the UN Global compact principles for the following reasons:

    • Our ethical and sharia fund choices currently available to members who wish to make a choice is based on criteria that goes well beyond the scope of the UN Global Compact principles. The membership base of these funds has particular concerns around issues like tobacco, gambling as well as controversial weapons, concerns that are not all covered by the Global compact. Our market engagement and research has told us that having fund choices that speak directly to cohorts of members who have expressed particular beliefs and concerns is important.

    • We expect all of our investee companies across all of our funds, not just those in our fund choices, to uphold high standards of behaviour and act in accordance with the spirit the Global Compact principles even if they have not actively signed up. For example principle two ‘to make sure that companies are not complicit in human rights abuses’ is a standard we would expect of all our investee companies. Where we identify such explicit breaches, we will use our ownership rights to vote and engage with these companies to encourage change in behaviour.

    • Unlike the UN’s Principles for Responsible Investment (UNPRI), the Global Compact is a code for businesses rather than investors; NEST is a signatory to the UNPRI and takes its Responsible Investment duties very seriously because we believe that sustainably run businesses are those that will offer shareholders and indeed the wider community the greatest long term benefits.

    • Whilst we fully endorse what the Global Compact represents we would like to conduct further analysis to assess whether it is the most suitable framework to use for screening out stocks based on ethical or socially responsible criteria. There are companies that are signatories to the Compact who have been in breach of the principles on anti-corruption, human rights and environmental damage on several occasions. It may be a reputational risk for us to say we only invest in Global Compact signatories when some of these companies are involved on a large scale in activities that the principles condemn. For these reasons we feel that a comprehensive Responsible Investment approach integrated across our Retirement Date funds, through considered company engagement and voting is most likely to create impact and uphold the values of the majority of our membership.

    • The UN Global Compact asks companies to ‘embrace, support and enact, within their sphere of influence, a set of core values in the areas of human rights, labour standards, the environment and anti-corruption’ which we fully support. However this, to us, reflects a general societal agreement. If an issue has reached this high bar of societal normalcy then the chances are that the activity that is outside these societal values is unlikely to be sustainable for the longer term.

    • Our primary objective is to deliver the best possible investment value for our members in our Retirement Date funds. However this does not mean we should pursue this objective at all costs so that it averts us from doing the right thing on behalf of our members. Any ‘values’ decision should be proportionate and analysis of potential member detriment undertaken. It is unlikely that the exclusion of a few companies that manufacture cluster munitions would have any discernible impact on our portfolios. However excluding companies based on a broader set of criteria like labour, environment and corruption is likely to amount to an increasing number of companies over time and may have a material impact on the investment value of our portfolios in the long term.

    • Whilst we do believe there is potentially merit in excluding companies whose main operations involves partaking in activities in contravention with international norms like manufacturing cluster bombs, we are not in a position to do this right now. We are largely invested in passively managed pooled funds. Requiring our fund managers to track a bespoke index whilst our assets under management are still small will prove disproportionately costly. There is a case to revisit this issue when our asset size is far more significant.

    I do hope the above provides an adequate response to your question. If you have any further comments or questions please do not hesitate to contact me.

    Yours sincerely,

    Mark Fawcett
    Chief Investment Officer

    NEST Corporation

  3. Ian Neale says:

    Thank you for publicising this report, Henry. I fully agree with what you say.

  4. Jim Owen says:

    Isn’t 39 out of 80, better than 4 out of 10?

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