Future of the Local Government Pension Scheme - LAPFF at #Lab14

Still catching up on my posts from Labour Party conference. On the Monday lunchtime I attended the Local Authority Pension Fund Forum (LAPFF) fringe.

The Chair of LAPFF, Cllr Kieran Quinn (standing in photo) spoke first on the future of the Local Government Pension Scheme (LGPS) and that the government had lost its nerve about forcing the merger of the schemes. He doesn't know if it will be on the agenda of any new government post May next year.

Kieran believes that fees are too high and by acting collectively you can drive out costs but decisions should be made locally. The government also seems to be backing off forcing schemes to invest in passive rather than actively managed investment funds.

Next speaker was Henry Boucher (on left), who is a fund manager and partner of Sarasin & Partners.

Henry is an active fund manager. He posed the question "Is active management really worth it?" and answered it by saying not all active managers are worth it and some are indeed over paid. But in the LGPS there are better results for lower fees than many other investments in the world. Research has shown that 40% of all fees are taken by only 10% of asserts,  mostly hedge funds.

He thinks the chief problem is that shareholders fail to hold companies to account. The USA even use to have what was called "bearer share certificates" with no names on them. Companies ran themselves. Chief Executives are being allowed to pay themselves too much. It cannot be right that they get an average $30 million per year.

He wants companies to be run properly and not use slave labour or destroy the environment. We need state of the art governance. The LGPS is good on this but needs some changes. However, it doesn't make sense to have all investments in passive funds.

My question about changes in LGPS governance with the requirement to involve employees more and how the panel thought this would happen?

Kieran thought that a greater scrutiny role by employees is for the good. The more diversity in boards the stronger the decision making process. He understands that some of the trade unions think there is a democratic deficit in the LGPS.

(Chair was Alan MacDougall from PIRC)

PIRC Corporate Governance & Responsible Investment Journalism Awards 2013

On Wednesday evening I went to the PIRC awards at the Design Museum on the south bank of London.

The winning journalists were Tom Bergin from Reuters (2nd left) who won the Corporate Governance Award for stories on tax dodging by Google. 

While Rob Davies (3rd from left) from the Daily Mail won the SRI award for his work on polluting mining giant Glencore (now who would think there was good in the Daily Mail?).

I suppose that I should ask PIRC MD, Alan MacDougall (on right of photo) why there isn't an award for CG or RI Blogging?  Or is this a contradiction in terms? :)  Must ask Tom P (who was poorly last week and missed the event).

LAPFF Conference 2010: Roundtable on UK Corporate Governance Code.

“Shareholders were asleep at the wheel before the financial crisis” Phil Triggs (Warwickshire LGPS) agreed with Lord Paul Myners that this was true. Other members of this panel were Alan MacDougal (PIRC) and Cllr Neil Fletcher (NE Scotland LGPS). My notes are not great on this session so I will report what I found interesting and not attribute to individuals.

It was agreed that very few pundits predicted the crash beforehand and many say they did now only with the benefit of 20:20 hindsight.

Check FRC site for further information on the Code. “The UK Corporate Governance Code (formerly the Combined Code) sets out standards of good practice in relation to board leadership and effectiveness, remuneration, accountability and relations with shareholders.

All companies ...of equity shares in the UK are required ...to report on how they have applied the Combined Code in their annual report and accounts.... The Code contains broad principles and more specific provisions...companies are required to report on how they have applied the main principles of the Code, and either to confirm that they have complied with the Code's provisions or - where they have not - to provide an explanation...the FRC issued a new edition of the Code which will apply ..on or after 29 June 2010”.

A problem with this Code is that it is addressing yesterday problems not what we will face in next 5 years? How can we really hold the directors of banks accountable and make sure that their oversight in the future is far more effective?

There is some controversy about how much the “bonus culture” was to blame for the financial crisis? There is evidence - such as the bonus problems within UBS for example. But how do you determine outcomes of behaviour?

There is an increased focus on below board level remuneration as being more important. Many employees in financial institutions are paid far, far more than the Board. Issue of the importance of Board oversight. Do they understand what is going on in their companies? The importance of Board diversity. Lot of evidence that dissent and challenge is good. Get any group of people together and you find if there is an extreme view challenging the consensus this results in a better outcome. Not enough boards challenge in this way.

Can having more women on boards change this? There is no hard evidence. But there are clear different styles of operation when you have more women on Boards. It does result in a change in the “group think” amongst men.

We constantly ask fund managers about their best practice but what about shareholders best practice?

Consensus that the Codes do work and have changed behaviour and practice. Nowadays there is no real discussion about whether or not you need to have independent executive directors for example. There are now very few now dominant CEO’s who don’t brook any opposition. But in the US this consensus does not exist.

Issue of “Governance imperialism” – the UK may be a world leader on good financial governance but is it just a modern form of imperialism for us to tell other countries (particularly ex-colonies) how to run their affairs according to our western norms and values? This is likely to be increasing issue in the future.

Unions 21: “Building Tomorrow’s Pension”

Still catching up on posting things. This well attended event was held on March 3rd in Portcullis House, House of Commons to launch a new Unions 21 publication called “Tomorrow Pensions”. Lynne Jones MP was Chair (middle). Unions 21 Chair Sue Ferns opened meeting by reminding us that unions are still most trusted by ordinary workers with regard to pensions ahead of employer and government. This is across the board. Even 45% of non-union members trust unions to look after pension interests.

First speaker was Paul Moloney (left) Nautilus assistant General Secretary. This union has merged with the Dutch and organises Merchant marine officers. His contribution was entitled “Engaged Investment: is there power in the union?”. Paul set the agenda that current pension policy was failing and we have the spectacle that the major economies of the world are not putting enough money aside to support decent pensions for its workers. He would like to see a co-ordinated response by pension fund trustees to force up safety and other standards in the maritime industry. This is not only good for the maritime unions but also for the pension funds since he argues that “without fail” investment in industries with good safety records produces long term sustainable investment returns.

Derek Benstead (First Actuarial) was next and he talked about “Pension design: is it time to think outside of the box?”

He pointed out that we will never do away with risk. Current 20 years old will probably draw pensions until they are 90. They will live through a number of recessions. Pension schemes which are too rigid will break. His solution is to share risk between state, employers and employees. In his view the Pension Protection Fund is the biggest and best thing to happen in pensions. Defined benefit is just too expensive and “risky” for employers. While the risk for employees with money purchase scheme is that if you are on £30k per year and trying to get £10k per year pension you may end up with £5k or £15k.

His solution is a hybrid pension, Defined contribution for members and 1/120th defined benefit for employers. There should be no refunds back to employers for any pension surplus. Schemes should be career average. He believes that it is important that there should only be discretional annual benefits increases only. He thinks that a major reason for the demise of pension schemes is the law now requires pensions to be increased by up to 2.5. % per year. He thinks this is too expensive and that they should be allowed to go down as well. Need more flexibility. Derek played the role of “Mr Bad Guy” with most of the audience.

David Pitt-Watson (right) was last with “Why a collective approach in investment could be the key to solving the pension’s crisis”. See Union 21 video

David started off as someone who is a City worker by apologising for the complete mess the “City” had made of things recently. He has been doing a lot of research in recent years on Pension structures and costs of investment with Matthew Taylor and the RSA. Including “Citizen Juries" (I was a “witness” to one of these Juries). Defined Contribution (aka money purchase) Pension policy holders typically pay a fee of 1.5% pa. This works out over the lifetime of a policy as 38% of your money goes in fees and you get only 62%. In good Defined Benefit (aka as final salary) schemes it only cost 10% in fees so you get 90% back. If at age 25 you invested £10,000 in a DC single pension premium it will generate £94,000 of fees!

Annuities are also very expensive. The issue is not so much Defined Benefit (DB) v Defined Contribution (DC)? Rather large collective pension schemes v small ones. For example women teachers in a USA scheme who aimed to retire on $2k per month. If a collective “pension pot” rather than annuity provided this money. It would cost a teacher 12.5% of her salary collectively. It would cost 23% salary if done individually. So “by design” pensions could be 83% higher. David admitted he’s been startled over some of the stuff he has read over last 18 months on this subject.

There was a useful Q&A. The risk of large collective DC schemes just ending up as modern day Equitable Life. My question is since the “problem” with DB schemes in increased life expectancy why are DB schemes now “unsustainable” despite many schemes putting back retirement ages? The consensus answer was that DB schemes are still sustainable if more money is paid into them or benefits reduced (or both).

One Unite member of the audience (Peter Sykes?) pointed out that when he hears the term “flexibility” he has to reach for his wallet.

Actuary Hilary Salt asked why did employers introduce DB schemes in the first place? It was to recruit and retain quality staff. This need still remains. There is a new "off balance" risk to companies. Since many employees will be too poor to retire and age discrimination will mean you can’t sack them. Companies will have to pay them off in the future.

Naomi Cooke from GMB pointed out the risk on state from inadequate pensions. Otherwise the low paid and those without decent pensions will have to reply on state benefits. We need to inflation proof pensions or the tax payer will have to pick up the cost. Have to design pensions around what society wants to produce.

Richard Balfe, the Tory advisor on trade unions to Cameron was also there and he actually spoke strongly in favour of public sector defined benefit pensions (shock horror) as not being “gold plated”.

Another person reminded everyone that DB still flourishes in the UK - but only in the board rooms of highly paid top 100 company directors!

A former TUC pensions officer pointed out in 1979 had the Tories not been elected we were on course to have a basic pension of 25% average earning and another 25%% from SERPS. So the average earner could have retired with 50% of earning.

Lets hope that 2010 does not turn out to be another 1979 of lost opportunities for social progress!

Update: I forgot to mention that Alan MacDougall from PIRC had also written a chapter in the report called "Responsible Investment: An Essential Trade Union Tool" but he was unable to attend.