Addressing problems in the voting of equity shares by pension schemes
The Taskforce on Pension Scheme Voting Implementation (TPSVI) was launched by the Minister for Pensions and Financial Inclusion in December 2020. It has just published a report[1] which makes recommendations on how to increase and improve the quality in the voting of equity shares by occupational pension schemes.
The Pension Scheme Voting Implementation (TPSVI) Report
Part one of the report explains ‘why voting matters’, and considers context and key problems: complexity in pension and investment structures; complexity in how voting is delivered; issues with splitting the vote in pooled funds; and stakeholder attitudes and asymmetry of power. On pooling, for example, it observes that “the service benefits of pooling are bundled with the limitations on the ability to set a voting policy. There is no automatic reason why this must be so. Many in the asset management industry have simply decided that it should be”.
Notwithstanding the key problems, TPSVI identifies that several trends are currently visible in the approach of pension schemes to stewardship, and thus voting. These include increased focus on the need for stewardship including voting, and increasing demands being placed on schemes, particularly in relation to climate change and ESG issues. The report states that these “trends are putting pressure on the current system of de facto delegation of stewardship and voting by schemes to agents – principally asset managers”.
In part two, the TPSVI consider the steps an owner might take in setting a voting policy; namely, policy development; policy implementation; and reporting and monitoring. Key points to note are that:
- whilst desirable, schemes need not set a voting policy[2] and, in practice, few have. However, they must take and demonstrate “ownership” of the policies carried out on their behalf; and
- fund managers should disclose policies more fully. Worryingly, TPSVI cites reports that suggest strongly that some fund manager’s voting polices are misaligned with their ESG policies – or perhaps even worse, their stated ESG policies do not reflect the reality of firm investment practice.
In terms of implementation, TPSVI recommends that managers of pooled funds should voluntarily offer investors the opportunity to set “expressions of wishes” (and the FCA is asked to confirm the legality of aspects of that process). For segregated funds, most managers say they will consider accepting voting polices from pension schemes, if negotiated for a bespoke or segregated mandate. It is noted that in “the light of evolving pension scheme regulatory requirements, a reasonable request from owners to the managers of pooled funds is an expression of wish – “please vote this way on certain issues”. In general – but not universally – such requests are [currently] refused.”
TPSVI also recommends that the DWP promotes a vote disclosure reporting template and that the FCA gives guidance on a key set of aggregate data that asset managers should be required to report.
Part 3 of the report is forward-looking, and includes a recommendation that, if the adoption of expressions of wish by managers is slow, the issue should be referred to the Law Commission to propose structures that give owners the necessary rights.
More broadly, government, regulators and industry are all asked to sign up to four recommendation-related principles.
Comment
The report’s objectives - encouraging trustees to set voting policies and making recommendations that will support the changes in behaviours needed from service providers to meet this objective – are laudable and achievable. The overarching message is that “voting matters”. According to the authors -
“Today, votes are seen as an important tool in the stewardship toolbox and, used wisely, can send important messages on a variety of issues from the appropriateness of executive remuneration to the rigour of net zero carbon strategies”.
Investment consultants should take heed too. The report cites a comment from one asset owner that “voting and engagement was not a priority to the investment consultant” – and there is a recommendation that investment advisers and consultants be regulated by the FCA, as recommended by the CMA.
[1] Taskforce on Pension Scheme Voting Implementation: recommendations to government, regulators and industry - GOV.UK (www.gov.uk)
[2] For the purposes of this report, the term voting policy is used to mean a set of guidelines or instructions issued by a pension scheme to an agent to inform voting on their shares. TPSVI do not envisage pension schemes instructing votes on particular motions.