End of Conference LAPFF 2013

Picture is from East Cliff in Bournemouth of the beach and the Pier. After close of conference I walked back to the railway station.

You can walk along the coast for most of the way. Some stunning views and a great way to get some exercise after late nights and sitting down for most of the day.

As you can probably gather I had a really interesting and good time. I suppose I can only hope that others have found my posts of some use or interest. 

Baron Myners "Capitalism without owners will fail" LAPFF 2013

The final speaker was without being at all disrespectful to the others, the best. Former City fund manager, Marks & Spencer Chairman, self professed trade unionist and former Labour Government Financial Minister, Baron Paul Myners.

Unfortunately this session was also held under "Chatham House Rules" which means I cannot report on what he said.

Which is a great pity but I understand that he is writing a book (with help of a top pension blogger and fellow founder member of "Struggle") so I assume there will be opportunities for us all to hear him in the future.

Paul actually joined in on the previous debate on investor collaboration but I assume his response to my question is also top secret? He did say it was nice to see me again (which I think is okay to report?).

This is my one and only Paul Myners story - normally at such conferences he tells me off for being on the Tower Hamlets Council pension committee that sacked him and Gartmore Group as our fund manager in 1990's. Being sacked by Tower Hamlets LGPS he has described as "the worse day of his life".  This time I introduced myself as a Newham Councillor which probably saved me.

:)

Investor collaboration: LAPFF 2013

"Investor collaboration" is a bit of a buzz word in pensions lately. Nearly everyone seems to think it's "a good thing" although there is less agreement on the best way to bring it about.

First speaker was Daniel Godfry, CEO of the Investment Management Association. As recommended in the Kay review they have set up a "Collective engagement working group". They want to tackle the lack of long term thinking. 

Complete the circle between asset owners, asset managers and the companies themselves. The real objective for pension savers is not what happens in12 months but size of pot when they retire in 20 or 30 years. Long term sustainable investment should be a competitive advantage.

Janet Williamson from the TUC (and "Trade Union Share Owners") spoke about the increased interest by trade unions in shareholder activity (see full account of TUSO here at last months TUC Pension Network Conference). They aim to use trade union staff pensions funds to collaboratively support union values and speak with one voice, share costs and punch above their weight.  They also want to work with other like minded investors.

Next was Richard Nunn of United Reform Church and the Church Investment Group (CIG) which was set by by the Church of England and Methodist Church in 2010.   An early battle was with one of their major fund managers who didn't want to vote in accordance to their wishes in company elections with "pooled" investment funds.  They just made excuses why this couldn't be done even though many other managers did so.  They had to be embarrassed into doing the right thing. They now have 6 members and will soon have real time data and will be able to see what is being done on our behalf.

Final speaker was Amy Borrus, deputy director, of the US Council of Institutional Investors (CII).  Amy said that the UK leads the governance world. There are now 120 public, private and endowment funds in the CII.  50% are public sector pension funds. They concentrate on two main things - long term horizons and index investment. This drives their interest in governance. In 1980s they tried to deal with takeovers; in 1990s boardroom behaviour and oversight; 2000s expanded to financial regulatory reform as Encom and Worldcom proved to be massive corporate frauds. The financial crisis of 2007 was a failure of corporate governance.  The big public funds team up with activist managers. Annual elections for directors and transparent pay votes are very important.

Despite progress investors still have a long way to go. You still get in US "zombie directors" of companies despite not getting majority support of shareholders. You should have "one share, one vote" and the right to vote in proportion of shares you hold. An increasing number of new "Start up" companies have duel or even triple shares with different voting rights.

My question to panel was that this conference had heard in the last 2 days plenty of things that suggest something is rotten in the investment world and that can LAPFF on a voluntary basis look into joining like minded organisation such as TUSC or CIG for collaborative voting? This went down well with Janet and Richard. The chair of panel (and LAPFF) Cllr Kieran Quinn said that LAPFF would consider it as they would any proposal from a member.

most of pictures in collage @LAPFForum twitter

The Future of the Local Government Pension Scheme: LAPFF 2013

The Government Minster for the LGPS had dropped out of appearing at conference this year (it was rumoured that he didn't want to be shouted at for the way that the consultation on merger was being handled - Surely not?) and Joanne Segars from NAPF and Chair of LGPS National Pension Advisory Board, who was suppose to replace him was ill.

So chair Brian Bailey now of PIRC, introduced a panel of what he called "three old codgers"-  himself, Terry Crossley (a former Civil servant responsible for the LGPS) and Cllr Kieran Quinn, to have a "chat" about the future of the LGPS.

They firstly discussed concerns about how sustainable the scheme was following the agreement of 2012. Especially mature schemes that had suffered the most in the recent revaluation.

Terry said he thought the current reform was rooted in the politics of the current Government Coalition. He was in the room when the LGA, unions and ministers agreed the deal and was suspicious since it was a big "ask" and a big risk in his opinion. A 1/49th career average scheme with no-one earning up to £43k paying any more?  How are the Hutton Report savings (£900 million per year) to be achieved? Increasing the contributions by staff was missed by the attempt to avoid further opt outs from the scheme.

Senior Firefighters in their scheme pay 17% of salary in pension contributions. Far more than senior managers in the LGPS (who to be fair, retire at a later age). Question mark on how long it can last? The 2016 revaluation is the most important. In 2019 the cost management process may mean that the Treasury in 2020 will insist in either an increase in contributions or reduced accrual (or only for new entrants?).

Kieran thinks that there will be continually uncertainty which none of us here have the answer yet but that the answer to increased costs could come from good investment returns (or of course cut the costs of running the LGPS?). 

Terry thinks LGPS 2014 saving are only £500 million pa. There will be problems with the reduction in numbers of active members as "maturation" occurs.

On the Governance side, Kieran thinks that the National advisory board is working well so far. The "call for evidence" on possible merger of LGPS produced many responses.  The new role of the pension regulator is currently unclear? We have to consider the role of non council employers in the scheme. He believes the role of trade unions and Employers working in partnership is very positive.

Terry is worried that that the National board might seek to be too ambitious. Elected Councillors are responsible for the fund. He believes that the role of local pension boards is advisory and only to scrutinise administrating authorities. (UNISON and others think he is wrong. If scheme members now bear the risk of poor investment then they must have an active say in governance)  He noted that there use to be 8 English local government regions. Is it possible to have 8 LGPS funds?

The treasury cost cap on employer pension contributions will be set next year by GAD (the government actuaries). The National Advisory Board meets on December 16th to consider the results from the "call for evidence".

Media Standards debate: LAPFF 2013:

This debate was with Martin Hickman (left) who use to be a journalist with the Independent and wrote a book on hacking with Tom Watson MP and with Evan Davies from "Hacked off". Cllr Kieran Quinn chaired.

Somewhat ironically but fully justified in the circumstances this fascinating debate was held under "Chatham House rules".  So I cannot post on this but will say if you have a chance to go and listen to Martin and Evan on this topic then please do.

I had a short chat with Evan afterwards about Libel reform (I declare a interest) and he said that he will be in touch about the threat to "no win, no fee" defence success fees in libel cases.

Tribute to Nelson Mandela: LAPFF 2013

On Thursday evening during the formal LAPFF Forum diner I looked down at my Blackberry and realised that former political prisoner and President of South Africa, Nelson Mandela, had died aged 95.

The next morning Cllr Peter Brayshaw from the London Borough of Camden addressed the Forum and made a formal tribute to Mandela. Peter is vice chair of Action for South Africa which is the successor organisation of the Anti-Apartheid Movement (AAM).

Peter made a short but wonderful speech about Mandela and his essential role in bringing freedom to South Africa. He reminded us that UK local authorities had played an important part in helping to bring about the end of apartheid.

I will post again on Mandela. This powerful bronze statute of him (above) is on the South Bank in London next to the Royal Festival Hall.  Go and have a look if you can.

Climate risk: stranded assets, fracking and CapEx challenges LAPFF 2013

It is not often that you see a Texas based oil and gas executive in a UK debate on climate risk.

This was the last presentation of the day.  Chair David Pitt-Watson started the debate by pointing out that there is more carbon in the ground than we can burn and if we were able to burn all the carbon we would fry. He also contrasted how much is spent on oil and gas exploration with that on developing green technologies.

If the financial crisis of 2008 was predictable since they were giving mortgages to those who could not pay them back then the forthcoming carbon crisis is equally predictable and with greater consequences the loss of 10 points GDP.

Craig Mckenzie, Head of Sustainability at Scottish Widows (left) spoke of the risk that oil and gas companies were being valued on the basis of unburnable carbon reserves and investing in production capacity that will never be used. Is the coal mining industry on a death spiral? Is there an oil "cost curve" which means that the oil price will fall and companies will not generate a return for expensive wells?

A good point about fracking is that you can close down coal power stations, this caused a fall in carbon emissions in USA to 1994 levels. The downside is the greater use of water in extraction, danger of polluting groundwater, it may cause a methane leak into atmosphere, earthquakes and disruption.  The benefits may out sway the downside but not everywhere.

Faith Ward, investment adviser to the UK Environmental Agency pension fund (on right) spoke about their audit on carbon footprints of the companies they invest in and the "Green Light Report" by ShareAction. She believed that LAPFF can provide leadership to long term investors on the risks of climate change.

The last speaker was Sarah Teslik from the oil and gas Apache Corporation.  She started by saying she is happy to play the villain and will not deny everything that has just been said. But the average length of time for a company in the US S&P or UK FSTE index is only 11-14 years. They don't stay that long despite all companies saying they have a bright future. She doesn't share everyone's confidence about making predictions over the next 20 years. When she was younger she was an environmental campaigner. Every claim made about the future at that time has proved to be wrong. 

There is a false argument about the "stranded assets" issue. We have gone through half of the worlds carbon reserves in the last 100 years that took 300 million to make. It is false to suggest that  "reserves" will have to be written off. The rules on reserves is highly regulated by the USA regulator the SEC. They are 3 types of reserves - probably, possible and proven. "Proven" must be ready to produce tomorrow.

"You should sweat about the other stuff... Oil wells are getting more expensive.... Sun power and oil are all energy.... its the getting to it that costs....what should keep you up at night is the geopolitical risk.... 90% of reserves are not in the "West".... They are in other countries where they naturally want to run things themselves and often they don't care about return but want to control supply for strategic reasons.... this is what should worry you". Finally she concluded that technological change and advances could solve the problems associated with climate risk.

There was quite a sparky but constructive Q&A with David getting some stick about not being a "neutral" chair on this subject. While I am firmly in the "sweating" camp about the risk of climate change it was good to see a polite, well argued and informed debate on this subject.

Good directors: LAPFF 2013

Jim O'Loughlin from PIRC chaired this session with first speaker, Sacha Sadan, Legal and General index fund.

This fund is huge and manages passively over 4% of the FTSE All share index. Since the fund does not pick or choose companies to invest into then the only added value it can achieve is to try and make sure that the directors it helps appoint are up to the job.

Sacha said they are looking for personal values such as independence, delegating and managerial skills - but leadership is the most important attribute. The directors have to show succession planning, diversity of thinking and be seeking sustainable returns.

While L&G will use its voting power to challenge poor structures and directors, they believe that engagement works best.

Next was Tom Dobell from the famous M&G Recovery Fund. They currently have 90 active holdings which they hold on average for 8 years. Its all about the "People", "Strategy" and "Cashflow" and often the best way to find out about a director is to have a cup of tea with them.

They don't invest if there is financial and operational problems and don't change their views even when they are out of favour in the market (such as now). 

15 years ago governance was box ticking exercise for many manager but they have always voted. He admitted that they have a way to go with diversity since only 3 out of the 90 Chief Executives (see picture of them above) are female. I think I could count a similar number of black CEO?

What the most important thing about an effective director? Trust. 

Deborah Gilshan from the large railway industry pension fund Railpen was last speaker. The major role of directors is to effectively hold the Executive to account on our behalf.  Robust oversight of management and ensure diversity of insights, skills and experiences.

Despite weaknesses the UK has far better governance than in the USA. While there is positive news some US managers ignore shareholders and reward themselves excessive compensation.  The question that has to be asked is in whose interest are they acting?

In the Q&A I noted that there was a degree of consensus from all speakers that "diversity" was important for directors yet I am trusted as an employee trustee on a £900 million pension scheme but in UK employers do not think that they should have any employee directors? In 19 other countries in Europe they have employee directors including arguably more successful economies than ours such as Germany. Don't you think that in the UK we are missing out on such diversity? 

Sacha and Tom answered by stressing the importance of companies consulting and talking with their staff and making sure that they share in the success of the company fairly. Which wasn't my question. Deborah was the only one to indicate that this was something to reflect on further.

Social Impact Investing: LAPFF 2013

Brian Bailey, Chair of PIRC and former senior member of LAPFF speaking about the 5 large Local Government Pension funds (LGPS) that are investigating a possible £250 million Social Impact investment.

Cllr Kieran Quinn explained what is social impact investing. It is the use of repayable finance to produce social and financial returns. Such as health, well being, better employment and improved social problems.

LAPFF sponsored a report  in 2012 by the Smith Institute on such investments. I think that most people would think that this is a "good thing" to invest in something has has a financial and social return but there are "challenges".

Small investment funds mean relatively high costs in fees and supervision. It is more risky than conventional investment and there are possible conflicts of interest if you invest a Council pension fund in your own locality.

A shared service approach is believed to be the best way of overcoming these risks and the need to make sure that there is a commercial return and to pass due diligence. Watch this space.

I went to the GIIN investor conference in October on what they called "Impact Investment".

Hat tip LAPFF twitter for photo.

Holding the Rating Companies to Account: LAPFF 2013

Dan Drosman from the USA Class Action law firm, Robbins Geller Rudman & Dowd spoke about
suing Rating companies after the 2008 Financial Crisis debacle.

At first it was thought that heads would roll in the big rating firms who had listed loads of companies as being super safe triple AAA only for them to go bust.

It had been claimed by agencies beforehand that if they rated a company as "AAA" this meant that the company could survive a "great depression" or even world wars. Some in the event never even lasted a month.

Rating agencies had claimed that under the USA constitution 1st amendment they could not be sued since they only ever gave "comment" which was protected as free speech. Dan was a former Federal Prosecutor and he was able to win an early civil court judgement that "fraud" was not protected by a free speech defence.  He was able to pursue a class action case against S&P and Moody over clients who had lost hundreds of millions of dollars in an British based AAA rated company. 

The allegation was that pre-2008 the agencies knew that the companies they were rating AAA had no historical data to justify such a rating. They would quote "stick their finger up in the air" to make up a rating in order to keep market share and also earn huge personal bonuses.

Eventually the rating agencies settled the case before it went to court. The details of the settlement is confidential but press reports of the time reported it was worth $227 million.

The USA government is currently suing the rating agencies.

Personally, I think it is clear that there are serious and substantiated allegations that senior Executives at these agencies knowingly profited from dishonest fraudulent activities. I hope the UK Serious Fraud Office (SFO) will be holding these Executives to account for these allegations sometime very soon.

If not, why not?

Licence to operate - Community Responsibilities of Companies LAPFF 2013

Picture of Josh Hardie, Corporate Responsibility Director for UK based supermarket giant Tesco. This is difficult times for Tesco who have recently announced a fall in worldwide sales.

Josh admitted that for 20 years Tesco's was seen as the challenger taking on the establishment. Now they are "the establishment".

There has been a loss of real energy because of this. The sense of bringing modern retail to the masses. The market is also changing. In recent years the number of people has risen from 42% to 53%, who believe, if price and quality is the same, that "Social purpose" is the most important factor in selecting a brand. 

Tesco don't want to say "We're big but..." instead "We are big and ...". They have 3 "Social purpose" campaigns to tackle global obesity; unemployment in young people and food waste. By tackling these issues they obviously believe that they are compiling with their community responsibilities and also promoting their brand.

While I am not sure that this is enough for such a major and powerful company, it is a start I suppose. 

Audit and Accounting (IFRS) LAPFF 2013:

This presentation was one of the most important and the first of a few LAPFF reports on how those who are suppose to be protecting us in financial services are letting us badly down (or even much, much worse)

Tim Bush from PIRC spoke first on "Getting the numbers right - a progress report".  This is an update on this LAPFF report
"UK and Irish Bank Capital Losses - Post Mortem"

Tim described how his fellow speaker, Iain Richards (bottom left) had originally wrote a paper "Bringing Audit Back from the Brink" in 2004 and how he was attacked and smeared by the Audit "profession" over it.

It is now pretty clear that the Banking Crisis was caused at least in part to the failure of the standard setters in the accounting profession. These standard setters "lost the plot" and the Financial Standards Agency (FSA) went along with it. There was since a "cover up". Rather than admit that the numbers were wrong they choose to "complicate, distract and confuse".

Banking losses are even now not fully disclosed. The Bank of England agreed (Nov 2012) that the undeclared losses in UK Banks are nearer to the £50 billion that PIRC originally estimated. Our investor coalition went to QC George Bompass for legal advice. He said that UK Company Law prevails over accounting profession standards.

This is vitally important since the audit profession makes the crazy, ludicrous claim that the accounts they "passed" of Banks that were now clearly insolvent, conformed to their standards at the time (if not the law). - so that is alright then?

What this investor coalition want is audit standards that are "true and fair value", prudent and maintain capital.

Iain spoke about how the European Union seem likely to insist on the retendering of company auditors after 10 years and the mandatory rotation after 20 years. This is not ideal but it at least establishes some important principles and is a tangible change at last.

But the real issue is the "diabolical audits". The banking collapse was entirely predictable. Auditors acted within flawed industry standards and not the statutory law. "All that matters is we comply with standards".  This is a great game of musical chairs and word play. We must get auditors to adhere to the legal framework.

My question to the panel is that without being too conspiratorial how much are such "conflicts" in company audits driven by the cross selling of services by audit partners e.g, investment advice.

The EU had suggested originally that firms should be only auditors but due to to massive opposition and lobbying this was dropped. In Germany this happens and the auditors are genuinely respected, do a good job and also make money.

A very interesting comment by David Pitt-Watson that he use to work for a large accounting firm and that there are still good, honest people in these firms who want to do the right thing. 

It was suggested that this is very true and that Tim and Iain get a lot of secret help and support from individuals in these firms however the governance of these firms over international standards is at least as bad as the discredited football regulator FIFA. If not worse.

I personally don't follow or to be honest, give a toss about football, but I do care about my pension scheme members, who trusted and paid large amounts of money to those so called "professionals" to audit the accounts of the companies their funds were investing into - it is now clear that we were all just being scammed and ripped off.

Unbelievably they want nothing really to change and still want to rip off pensioners, orphans and widows in the future.

National LGPS Procurement Framework. How to save your fund time and money. LAPFF 2013

Nicola Mark from Norfolk Local Government Pension Scheme (in which I have a number of UNISON members at my employer who are in this scheme) spoke about funds working together on procurement to save time and money.

If they did this then they would not have to independently undertake the full European Union (the infamous and expensive "OJEU") procurement process as well as achieving efficiencies by acting together.

They would also retain local services and decision process. 39 LGPS funds have so far expressed an interest. 

(picture LAPFF tweet)

Activist investor panel: Does activism enhance company value for investors? LAPFF 2013

David Trenchard from "activist managers" Knight Vinke (on left of photo) target large companies which they believe have hidden value.

They aim to challenge the status quo and unaccountable management. They do not believe in the USA model of activism which is seen as being aggressively litigious.

Alex Pauisco from DBAY advisers (no link on Internet? on right of picture) currently concentrate on small companies. While investors traditional sell shares in companies they think are not run properly they buy more in order to change. Jurisdiction is key. In Asia activist managers will lose money. In the US it is tough since you have little rights. Europe is good because shareholders have rights.

Bryan Schneider was last speaker (2nd left) from Entrust capital who invest in hedge funds. They use research to invest in the best of class. They manage billions of dollars and their aim is to unlock value by investing on track records and references.

In Q&A I said that I could understand that by exploiting market inefficiencies they can make money but surely pension funds are about long term investments over 20 years not "4 to 5". How do they respond to the accusations that they are creating short term value by destroying it in the long term.

The Chair, David Pitt-Watson said this used to be called "asset stripping".  Alex said they follow the advice of legendary USA investor Warren Buffett that they only buy if want to own all the shares in that company and want to hold them forever.

"Licence to Operate. Holding Companies to Account" - LAPFF Conference 2013

Chair of Local Authority Pension Fund Forum (LAPFF) Cllr Kieran Quinn welcoming members to the 18th Annual Conference in Bournemouth this morning. The theme of this years conference is "value for money" and holding asset managers and advisers to account. 

LAPFF is a member organisation of Local Government Pension schemes (LGPS). Its purpose is to promote the investment interests of its funds as well as encourage social responsibility and corporate governance. Collectively it has £115 billion of assets.

Next was an introduction by former Hermes fund manager and joint author of "The New Capitalists" David Pitt-Watson, who is now at the London Business School.  David referred to the changes in Governance that has taken place since The Cadbury Report of 1990.  He called it a "journey not a destination". Companies we own should be doing what we want them to do. At the moment David is writing a new book on Finance.

David made an important final point that it will be no good if you have a good pension but retire in a world that has been destroyed by climate change.

The conference will finish tomorrow lunch time. I'll try and post on as many presentations and speeches as I can.