I found this article on Mallowstreet, a gated community for pension people. It is written by Sandra Woolf and its main contributor, Richard Butcher is both professional trustee and Chair of the PLSA. It is based on a press release issued by PTL which you can read here
It merits our attention as representing received wisdom.
Do trustees risk creating a ‘dangerous illusion’ about member voting input?
Giving members a ‘vote’ is a dangerous illusion that the industry needs to be wary of, professional trustee firm PTL has said.
The pensions industry should “proceed with caution when it comes to giving members’ the illusion they have voting rights on the shares in their pension schemes”, the firm argued.
Managing director Richard Butcher said that while voting is much talked-about at the moment, “when it comes to giving members a sense they have a say in those votes it becomes far more complicated and we risk creating a dangerous illusion for them”.
Butcher said stewardship is investors’ chance to influence companies, not least to make them become more sustainable. “But, and it’s a big but, most schemes invest in pooled funds which presents two critical challenges that are hard for trustees to overcome. First and foremost, due to intermediation, schemes rarely have ownership rights and are often several steps removed from the actual legal owner. Then there’s the issue of scale; a handful of schemes may command the attention of the managers, but the majority, in isolation, will not,” he said.
The ability of most schemes to influence is therefore “pretty weak”, he argued, questioning also the effectiveness of the threat of divesting from the manager. He said rather than creating illusions of power, trustees should focus on demonstrating to the members that their investments are doing good.
The issue of voting in pooled funds is currently being looked at by the Taskforce on Pension Scheme Voting Implementation, backed by the Department for Work and Pensions.
Also of merit – though for different reasons, are the views of Tumelo. Tumelo provides voting software so that members of pension schemes can indicate their preferences as to how the funds their money is invested in, vote. This article is written by Tumelo’s CEO – Georgia Stewart and appears on Tumelo’s blog.
Delusions about “illusions” – why we should strive towards member empowerment.
“Giving members a “vote” is a dangerous illusion that the industry needs to be wary of.”
Well, that’s Richard Butcher’s opinion. Here is ours:
Before using Tumelo, most pension members don’t really know what a pension is. They don’t know it’s invested in companies. They can’t explain the role of a trustee or a fund manager; nor the link between compound interest and their future financial circumstances.
It’s also pretty hard for them to comprehend the scale of the investment system, and the gravity of influence that system has on the world around them: the companies that win or lose; the issues – like climate or human rights – that are tackled or ignored.
I am a pension member in my 20’s. And if not for my niche passion for sustainable finance, I wouldn’t know this stuff. The wall of jargon and complication and fear that some professionals have built around pensions is so insurmountably high that, I, like most others, would never attempt to scale it. Rather ‘bury my head in the sand’, as our users often put it.
We created Tumelo so that members would truly understand their pensions and how important those trillions of pounds are for the future prosperity of our society and natural environment. Our solution gives transparency to members about where their money is invested; we help them communicate their opinions on issues to trustees and fund managers, and we show them the impact their savings are having on the world around them. That impact is thanks to the voting and engagement trustees and fund managers do on their behalf.
Richard is concerned solutions like Tumelo give members the “illusion of power” but there is no illusion. Members are powerful. Responsible stewardship is how fund managers address the global challenges faced by companies they invest in. But fund managers can only invest in those companies because pension members entrust their personal savings to them. These members have power by virtue of the choices they make: whether to invest at all and whom to invest with. What we need, in fact, is for members to feel more powerful. “Disillusionment“, as Richard put it, is surely only possible where there is already an illusion. Sadly, most members can’t even name their provider. Forget about using the power they have to change their own futures.
Richard also suggests that solutions like Tumelo “create a potentially dangerous scenario that could give rise to member dissatisfaction”.
Are there not 1.9 million people living in pension poverty in the UK right now? Is public trust in financial services not the lowest of any sector? Are satisfaction levels with pensions even measurable, when engagement and understanding across the board are so low? I’m not interested in naming names, because we’re in this hot water together, but if you care to check out these scores on Trustpilot you will see your members are unlikely to feel satisfied at the moment. Clearly, the industry has already created a “dangerous scenario” that does already give rise to member dissatisfaction. That problem is what we – and many others who we work with and admire – are trying so hard to address.
Richard is worried about member outcomes if we give them “a sense they have a say”. He says “In a worst-case scenario it could lead to opt-outs, a potentially disastrous unintended consequence that we need to do our best to avoid.”
Of course, there is risk associated with new technology and new ways of communicating with members, though most scheme trustees are well versed in risk-reward profiles. “Past performance is not an indicator of future returns” may hold true for investments, but it doesn’t for technology. We need only to look at the evidence from member behaviour over the past year. It is overwhelmingly positive. Using Tumelo reduces financial anxiety, increases confidence and prompts positive actions like learning and consolidation from pension members who were previously disengaged. Across demographic groups, members are engaging more often; proactively asking questions of colleagues; comparing their pension to other investments they might have. Even when the vote at a company goes a different way to a member’s opinion, they are glad to have been included and to understand the rationale for that decision.
Previously, trustees have struggled with unrepresentative member opinion. A few “ESG fanatics” who bother them frequently. Where member surveys might get 2% uptake, Tumelo is seeing upwards of 20% of workplace pension-scheme members engage; telling us what they think about ESG issues – not in isolation but in the context of their savings. And that information is being used by trustees and fund managers alike – those who are leading on stewardship – to shape stewardship priorities; to help them engage with companies in their funds and to decide what financial products to create for the members they serve. The opinions we collect from members are impacting their futures.
As Richard pointed out, PTL trustees will play a “vitally important role” in stewardship this AGM season. Therefore as a trustee, why wouldn’t you want to know what your members thought about the most important issues the world is facing? At Tumelo we are only helping trustees to gain that insight; to connect with members; and to create long-lasting positive, change in an industry that sorely needs it, to close the monumental savings gap.
I’m not sure that fans often have a vote in “top table” football matters, Henry.
As for member intentions, there is a tendency for small groups (and sometimes even individuals) to carry disproportionate influence. On an IPE webinar yesterday, a representative of BT Pension Scheme (which is larger even than USS) claimed that 62% of members wanted their pensions to be invested in good (as opposed to bad) ESG businesses. When I asked how many members had responded to that particular (electronic) survey, I was told about 8,000, who therefore represent around 4% of the total membership in a scheme with around 200,000 members and 320,000 members and other beneficiaries. So a 62% claim is really based on less than 1-in-40 of the membership’s “votes”.
Is the tail wagging the dog?
That would be the conventional view. In most elections, a significant part of the membership not only do not vote, but do not engage with the election. That is their right. But it is also the right of those interested in issues, to campaign on them. As well as finding information on their investments hard , members of DC pensions are starved of meaningful information on other matters, such as the performance of their funds and the value they are getting for their money. The accepted wisdom is that if people were to know, they might stop saving. I find this position unacceptable.
As then Chair of Trustees of a major DC scheme that implemented Tumelo and as an adviser to a Master Trust that has also integrated Tumelo into its value proposition, I was surprised to read Richard Butcher’s alarming warnings about the perils of engaging with members about their voting preferences.
Richard is of course right to alert us to the perils of negative consequences from the most well intentioned member communication exercises. Back in the day, I remember one communication exercise intended to increase average contribution rates delivering significant impact – unfortunately its impact was to reduce average contributions, as members realised to their horror how much of their monthly paycheque was being diverted into their pension…..
Hopefully we have all become more aware of both the risks and benefits of engaging with our members. It’s certainly the case that technology allows us to measure success far more quickly and effectively, helping us to evolve our communication strategies to improve their effectiveness. Good tech can inventory and remedy adverse outcomes very quickly. As to Richard’s particular concerns, that members may be so demotivated when they realise that their voting preferences don’t necessarily translate into actual votes by their manager, that hasn’t been our experience at all.
On the contrary – and the evidence is strong, with up to 20% of members expressing their views. Members have been pretty well unanimously positive about being made aware of shareholder resolutions, seeing both sides of the argument, for and against, and then being given the opportunity themselves to express a preference. We did worry that members who expressed a particular opinion but then discovered that their fund manager had voted in a different way, might feel frustrated. Even in these circumstances, the outcome was positive, with members saying things like “ thank you for the explanation, I hadn’t appreciated the issues were so complex. I feel I understand them far better now”. This does of course put an onus on the fund manager to provide full and accessible explanations of their voting decisions – another great, if indirect, benefit of asking members what they think! My favourite member response though was: “It doesn’t matter how tiny an investor you are because you can still have your voice heard. You can then pass it on to someone with higher power who is capable of instigating change.”
Might members come to feel that whatever opinions they express, it doesn’t make any difference in the long term? I suggest quite the contrary.
There are at least two major fund managers expressing real excitement about the possibility of using member views to shape the allocation of their own scarce engagement resource. And once the communication channel with underlying investors has been opened, managers can use the channel to expose the value of their engagement activity by explaining their successes to members. A closer relationship between members and the real world impact of their pension savings is surely one of the answers to the engagement deficit (both with corporates and between schemes and their members!). To the scale of the deficit that we have to tackle, another piece of real member feedback: “I can’t believe my pension is invested in so many companies”…..
As far as trustees are concerned, they are under increasing pressure to seek members’ views about ESG issues. There is a parallel move to increase scrutiny of trustees’ own stewardship policies – no longer will it be acceptable to “leave it all to the fund manager”. How else are trustees to build member views into their stewardship policies without consulting their members about what is important to them?
For those trustees who do wish to develop distinctive stewardship policies, the next step will be to ask pooled fund managers to split their votes, so that the trustees’ stewardship policies, informed by their member views, can be given direct effect. I am confident this will come and will add further to members’ capacity to see their views delivering real world impact.
I am so positive about what I have already seen of Tumelo’s capacity to add value to members, to employers, to trustees and to fund managers I joined the company as an adviser.
Julius Pursaill is a board adviser to Tumelo.
Thanks for airing this, Henry, I think it’s very important that we get the facts straight on what is or is not being proposed. I can’t speak for TPSVI, but I can talk about Minerva’s own experience with supporting pension schemes who want the cost benefits of pooled/index funds, but want their voice to carry the same weight it did before when they had a segregated DB mandate.
Member engagement is something we should positively encourage, it’s good for pensions and investments generally, and more specifically, it helps to ensure the tail isn’t wagging the dog by being open, transparent and willing to proactively explain what is or not possible or desirable.
Nobody is suggesting that the trustees cede their power, nobody is suggesting that the law be changed to give pensioners votes at a distance. The evidence is clear that an “expression of wish” is not only legal but a common device in trust-based arrangements. Let’s also not forget that the UK Stewardship Code thinks there is a problem with client comms – it’s why the 2020 Code introduced a new requirement for better explanations about the ways managers have applied good stewardship principles on behalf of their clients.
Last time I checked we were still living in a democracy where diverse opinions were welcomed. Happily, women no longer need their husband’s permissions to get a credit card or a mortgage and children no longer get sent up smoke stack chimneys and it’s illegal to discriminate on the grounds of protected characteristics. These things have come to pass because, quite rightly, we’ve talked about the kind of society we think is good and right. Money is an integral part of society, so it’s only good and right we now debate its role. ESG and climate change are major new forces for everyone to consider, crowd sourcing ideas and promoting mutual understanding about how we are going to create sustainable wealth is, to my mind at least a very good thing.
Sarah Wilson is CEO of Minerva Analytics and provides proxy voting services to institutional investors and vice chair of TPSVI. The views expressed here are my own.
Fiduciary absolutism to maximise short-term profit for shareholders is a foolish endeavour when the majority of underlying shareholders are in fact long-term investors, saving for their retirement. We need instead to adopt stakeholder capitalism, where the purpose of a business is to provide for all stakeholders, not just shareholders. Of course, if we recognised shareholders for who they really are (mum & dad, consumers, employees, citizens, volunteers, me, you) then we would also recognise shareholder capitalism and stakeholder capitalism for what they are: one and the same. The problem lies in who currently sees themselves as the shareholder: the service-provider, interested in short-term profit creation to improve sales or the underlying saver seeking a comfortable retirement in a peaceful, harmonious world. What we need is for that underlying saver to understand the importance of their role in the financial system and the truly long-term nature of their outcomes. If they can begin to appreciate that, then fund managers and other service providers could continue to create real value, over the longer-term, without the short-term pressures they currently face. To get underlying savers to understand, we need them to engage, and engagement is a whole lot easier when give people a sense of ownership, influence and empowerment. Things we believe savers should feel because they are owners and they do have influence because they are powerful. And that is why we do what we do at Tumelo.
Ironically, the views of those opposed to greater engagement in pensions are rarely heard outside of the bubble of pension experts. But auto-enrolment has created a view that the less said the better which suits the status quo. This is why pensions so needs some positive disruption and thank goodness there are people like you around Georgia!
Thanks Henry – you’ve done a good service airing the debate.
I’m firmly on the side of members having a say – even if in reality it’s only expressing an opinion. It’s a start. And the more we talk about these things, the more the conversation will grow. Which will be good for all of us.
I was talking to a young person yesterday who was interested in working at Quietroom. She was passionate about social justice and asked how she might pursue that at Quietroom. I gave her 60 seconds on how her pension was invested in the real world – and if you wanted change you had to follow the (her) money. It was great to see the penny drop.