A recurring complaint in recent years has been the difficulties faced by investors in pooled funds who want a say in how votes are cast on their behalf. There was a significant step forward recently when the Taskforce on Pension Scheme Voting Implementation – set up late last year by the UK pensions minister Guy Opperman – published its recommendations.
The Taskforce’s recommendations seek to facilitate voting and improve the quality of voting by occupational pension schemes, although many of them would benefit other asset owners too. The minister is a vocal champion of stewardship, so we can expect to see at least some of the recommendations implemented.
The recommendations are pragmatic, not attempting to remove the barriers that arise from the complexities of the legal framework within which pension schemes operate. Instead they work within the existing framework and build on recent developments such as the UK Stewardship Code 2020 and the annual implementation statements that pension scheme trustees must prepare about their voting and engagement activities. The recommendations include:
- Asset managers should allow pooled fund investors to set voting expressions of wish and the Financial Conduct Authority (FCA) should clarify that managers are permitted to act on such expressions.
- The FCA should support improvements in the voting information that managers provide to their clients, for example by:
- monitoring delivery of fund/mandate-level vote reporting, taking action if this is not done by the end of 2022;
- setting an expectation that managers will respond promptly to requests for the rationale for their voting decisions; and
- ensuring that any disclosures on “private” voting policies are made to all clients, not just some of them.
- Pension scheme trustees should either:
- set and publish their own voting policy; or
- publicly take responsibility for voting policies implemented on their behalf, including by disclosing their managers’ policies on at least three topics with an analysis of any differences between the policies of different managers.
Measures to improve the transparency of managers’ voting would be particularly welcome and benefit a much wider group of asset owners. Those focused on fund/mandate-level disclosures would address the anomaly whereby pension schemes are required to publish annual voting information, but their managers are not required to provide that information to them.
When LCP recently asked 78 listed equity managers if they could provide such data using the industry-standard Vote Reporting Template developed by the Pensions and Lifetime Savings Association, only 43 (55%) said they could currently do so.
Increasing the demand for high-quality voting
The Taskforce has sought to address the demands of asset owners who want more influence over their voting, but it also recognises that more needs to be done to increase the demand for such influence.
Support for stewardship has been growing, with increasing resources devoted to this area by asset managers, regulators and policymakers. However, most pension schemes still do not place much emphasis on stewardship in general or voting in particular. There is a tendency to delegate and forget. The new implementation statements are a start, ensuring that voting and engagement are given more agenda time, but they are generally treated as a compliance exercise rather than as adding value for pension scheme members.
That needs to change. Investment consultants and others need to get better at making the case for stewardship and the importance of asset owners exercising oversight of their asset managers’ activities in this area. Stewardship is particularly important for addressing systemic risks, since these cannot be adequately addressed through portfolio construction, and for safeguarding the long-term functioning of investment markets.
We need to find ways of making vote reporting more accessible and decision-useful for asset owners, using it to highlight differences between the managers’ voting practices and hence why oversight is necessary. Voting should become a meaningful part of owners’ manager selection decisions as this is when they have greatest influence. It is also far easier to appoint a manager whose voting policies are aligned with the owners’ preferences than to seek to influence the policies of an existing manager. The Taskforce’s recommendation to focus on three priority topics is a sensible and proportionate way of increasing the effectiveness of trustees’ voting oversight.
The Taskforce has made a valuable contribution to the movement in support of better stewardship. Although its remit was narrowly focused on pension schemes and voting, its recommendations have wider applicability and point the way to greater emphasis on other forms of stewardship. We can expect further policy and regulatory action in this area. We can anticipate it by making the case for better stewardship, providing higher quality and more accessible information on voting and engagement, and encouraging asset owners to place greater emphasis on stewardship when selecting and monitoring their asset managers.
