Dr. Anna Tilba

Engaged vs Disengaged Ownership:

The Case of UK Pension Funds

Rethinking the Economics of Pensions IIMarch 20th-21st, The Corn Exchange

Introduction

Research backgroundAcademic and Practical Significance

Key FindingsImplications

Future directions Current Work

Research Background Ownership Paradox:

Use of equity is liquid and without commitment (Davis, 2008; Jackson, 2008)

The Financial Crisis UK Policy concerns: Lack of investor engagement:

The Stewardship Code 2010 Ownership Commission Report 2012

The Kay Review 2012

Investment short-termism

Investment Short-Termism Increased share turnover

In the US: average stock holding period on the NYSE - 7 months

In the UK: average duration of equity holding fell from 5 years in 1960s to just over 7 months in 2009 (Haldane, 2010)

Ownership, Control, Accountability?

Research Objective: To examine how the practice of pension fund investment management informs the ownership behaviour vis-à-vis investee corporations

There is a need to widen the analytical focus from dyadic relationship between investor and corporation to a broader understanding of the wider system of actors and relationships to encompass various types of institutions that invest capital in corporations.

Pension Funds• One of the largest asset-owning types of investor in

the UK• Investing 43.1% of their assets (£400 billion) in UK

equities (The Purple Book, 2010).

• Overseas equity ownership is increasing 24% in 2006 to 57.2% in 2011 (The Purple Book, 2011).

• Potential long-term investors

• Very little is known about pressures, challenges and how pension funds operate

Current industry conditions:

• Unstable markets• Increasing liabilities and deficits (LDI)• Decreased funding levels (111,4% in 2007 to 79% in

2009 (The Purple Book, 2009)• Heightened policy expectations to become ‘engaged

owners’ Myners Report, 2001

The Walker Review, 2009 The Stewardship Code, 2010

The Kay Review, 2012

…yet there are only a few studies examining pension funds in relation to

corporate governance (see Tilba 2011; Tilba and McNulty, 2013 for a review)

Existing empirical evidence is mixed and the recent evidence indicate that

pension funds operate as distant, short-term owners of shares

(Faccio and Lasfer (2000), Cox, et. al. (2007), FairPensions (2008; 2009), Crespi and Renneboog (2010), and Tilba and McNulty (2012)

How can we explain this behaviour? What are the drivers?

Data Sources

• Interview program: 35 Face-to-face semi-structured interviews with trustees, pension fund executives, chief investment officers, actuaries, investment consultants and fund managers.

• Observations:

Documentary analysis

• Documentary Analysis: organisational charts, official role descriptions, scheme rules, policy statements, pension committees information, investment monitoring policies, statement of investment principles, investment performance evaluations, funding strategy statements, annual reports, etc.

Date Organisation Type of Meeting

23 Jan 2009 Local authority pension fund (a/m £ 3 billion) The investment committee meeting

28 Jan 2009 LAPFF (a/m over £ 95 billion) AGM

24 Feb 2009 Occupational pension fund (a/m over £ 22 billion)

The investment committee meeting

16 Apr 2009 Occupational pension fund (a/m over £ 13 billion)

Investment outlook meeting

How

Research Findings

Ability & Willingness

Engaged Funds Disengaged Funds

Lack of

Ability & Willingness

In-house investment Management

Delegation

Com

pany

rese

arch

&

Mon

itori

ng

Votin

g /P

roxy

vot

ing

Lette

rs

Face

to fa

ce d

ialo

gue

H

irin

g/Fi

ring

man

agem

ent

Reso

lutio

ns/P

ropo

sals

Th

reat

s of

EG

Ms

Publ

ic T

actic

s Fu

nd m

anag

er m

anda

te:

Del

egat

ing

votin

g an

d al

l to

do w

ith e

ngag

emen

t to

the

fund

man

ager

and

focu

s pr

imar

ily o

n in

vest

men

t pe

rfor

man

ce.

Dis

cipl

ine

is e

xerc

ised

th

roug

h Ex

it (s

ellin

g/tr

adin

g)

Internal Resources

Reliance on external expertise

Share Ownership Dependencies along the investment chain

Pension fund Ethos

Influence and focus on investment performance

Disengagement and Delegated Investment Management

• Strategic Investment: Reliance on External Expertise

• Dependence along the Investment Chain • Influence and Focus on Investment

Performance

Pension FundTrustee Board

CEO/CIO(Officers)

Actuary

Investment Consultant

InvestmentFund Managers

PLC

PLC

PLC

PLC

- Actuaries representing the employer and Implicit Influence for Short-Termism

Pension Funds and the Actuaries(ambiguity of valuation)

‘Actuaries are under the enormous pressure to...be advising the trustee and the company… the scheme actuaries must find it enormously difficult to try and advise the trustees the best way they can and in a way which is sensitive to the employer’(Pension Policy Manager/Occupational Pension Fund/Assets under management over £30 billion/Industry: Education).

Pension FundTrustee Board

CEO/CIO(Officers)

Actuary

Investment Consultant

InvestmentFund Managers

PLC

PLC

PLC

PLC- Consultants’ Power and Influence - Contribute to short-termism - Lack accountability & challenging by trustees

Pension Funds and the Investment Consultants

‘The majority of the decision-making would be done by the investment consultants and there is obviously an industry dominated by few large players like Watson Wyatt, Mercer and Hewitt – people like that are making the top level decisions’ (Investment Manager/Asset Management Firm/over £37 billion).

‘Hewitt, Watson Wyatt, Mercer ...they have had far too much influence and that’s primarily because we don’t have the skills in house’ (CEO/Occupational Pension Fund over £11 billion/Industry: Energy and Utilities)

Pension FundTrustee Board

CEO/CIO(Officers)

Actuary

Investment Consultant

InvestmentFund Managers

PLC

PLC

PLC

PLC

- Blurred Responsibilities- Actuaries representing investment consultancy firm and short-termism

Actuaries and the Investment Consultants ‘…when we are agreeing on strategy there is an actuarial side to the

investment proposition. Therefore it is quite useful to us to actually have the scheme actuary say that that investment strategy is probably not very sensible because of this and that and the other. If the actuary and the

investment consultant were from the same firm, it would be quite difficult for that firm to contradict what somebody else in that firm has already advised

you… they don’t go against each other’ (CEO/Pension Fund/over £3 billion).

Pension FundTrustee Board

CEO/CIO(Officers)

Actuary

Investment Consultant

InvestmentFund Managers

PLC

PLC

PLC

PLC

- Interdependency and Short-Termism- Pension fund herding

Investment Consultants and the Fund Managers‘Consultants have to keep a good relationship with the investment managers because they need the intelligence about all of them to be able to advise us...they are quite reluctant to advise on dismissing a manager’ (CEO/Pension Fund/over £2 billion)

‘The dynamics are interesting because most of our business is brought to us or introduced to us by those consultants. They are crucial to the way our business operates and runs’ (Head of Client Account Team/Global Financial Services Provider/over £300 billion)

‘The solutions are generally sold not bought. there are some very clever people among consultants and there are some very good marketing departments for fund managers and between them they sell their products. We and the trustees tend to go out and buy those products that we are sold. So we tend to be waiting for somebody to sell us something’ (CEO/Pension Fund/Industry: Energy and Utilities/over £ 11 billion)

Pension FundTrustee Board

CEO/CIO(Officers)

Actuary

Investment Consultant

InvestmentFund Managers

PLC

PLC

PLC

PLC

- Lack of fund manager influence - Dependency on the companies for information -

Fund Managers and Corporations‘We typically own around 5% of every UK company so we are one of the biggest shareholders in the UK…despite us being a major shareholder, we actually had very little influence at the end of the day’ (Head of Client Account Team/Global Financial Services Provider/Assets under management over £300 billion)

‘We looked at the Marks and Spencer issue and although it wasn’t great, we weren’t going to spend the time, the man hours, the cost of teaming up with ten, fifteen other private client brokers who would have a significant stake just to have a re-shuffle of management, which may have no effect on turnover, margins or whatever’ (Investment Director/Investment Fund Management

‘It is absolutely a conflict of interest amongst the fund managers and corporations in terms of governance and engagement. I know it from talking to active fund managers... they have had push-backs from other participants…within their own organisation about taking strong governance positions on certain companies because they have the business links with them’ (Co-head of Responsible Investment/Pension Fund/Over £30 billion)

Implications • Pension funds’ ownership behaviour is more assumed than

demonstrated• Operating with high dependence on external experts, pension funds’

investment practices are laced with interests and influence that ensure that pension funds focus on investment performance

• Responsibilities and accountability within investment chain are loose and perhaps confused: there are many agents but few active principals

• The disconnect between beneficiaries of investment and the activities through which their money is invested.

• Actual Owners->Institutions that hold shares->Investment Experts-> Money Managers

• Share ownership absent from any significant stewardship responsibility

The Law Commission's Consultation on Fiduciary Duties of Investment

Intermediarieshttp://lawcommission.justice.gov.uk/consultations/fiduciary_duties.htm

InterdependenciesAccountability

Reliance on other agents

Investment Chain

Complexity

Policy Implications: The Kay Review 2012

Current work ‘Stewardship’ and Pension Fund ‘Fiduciary

Duties’

Contextual Drives of Investment Behaviour

Responsibilities and Accountability with the Investment Chain