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Dr. Anna Tilba

Rethinking the Economics of Pensions II. March 20 th -21 st , The Corn Exchange . Engaged vs Disengaged Ownership: The Case of UK Pension Funds. Dr. Anna Tilba. Introduction. Research background Academic and Practical Significance Key Findings Implications Future directions

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Dr. Anna Tilba

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  1. Rethinking the Economics of Pensions II March 20th-21st, The Corn Exchange • Engaged vs Disengaged • Ownership: • The Case of UK Pension Funds Dr. Anna Tilba

  2. Introduction Research background Academic and Practical Significance Key Findings Implications Future directions Current Work

  3. 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

  4. 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)

  5. Ownership, Control, Accountability?

  6. 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.

  7. 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

  8. 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

  9. …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?

  10. How 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.

  11. Research Findings

  12. Disengagement and Delegated Investment Management • Strategic Investment: Reliance on External Expertise • Dependence along the Investment Chain • Influence and Focus on Investment Performance

  13. - Actuaries representing the employer and Implicit Influence for Short-Termism Actuary PLC PLC Investment Consultant Investment Fund Managers Pension Fund Trustee Board CEO/CIO (Officers) PLC PLC 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).

  14. Actuary PLC PLC Investment Consultant Investment Fund Managers Pension Fund Trustee Board CEO/CIO (Officers) 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)

  15. - Blurred Responsibilities - Actuaries representing investment consultancy firm and short-termism Actuary PLC PLC Investment Consultant Investment Fund Managers Pension Fund Trustee Board CEO/CIO (Officers) PLC PLC 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).

  16. Actuary PLC PLC Investment Consultant Investment Fund Managers Pension Fund Trustee Board CEO/CIO (Officers) PLC PLC - Interdependency and Short-Termism - Pension fund herding Investment Consultants and the Fund Managers ‘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) ‘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)

  17. Fund Managers and Corporations - Lack of fund manager influence - Dependency on the companies for information - Actuary PLC PLC Investment Consultant Investment Fund Managers Pension Fund Trustee Board CEO/CIO (Officers) PLC PLC ‘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)

  18. 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

  19. Policy Implications: The Kay Review 2012

  20. Current work ‘Stewardship’ and Pension Fund ‘Fiduciary Duties’ Contextual Drives of Investment Behaviour Responsibilities and Accountability with the Investment Chain

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