Technology is enabling greater involvement of pension fund beneficiaries on ESG issues, up to a point.
We are taught from an early age that it’s good to listen. But it’s a lesson that pension schemes have often failed to heed when it comes to taking on board the views of members, including on ESG priorities.
“The pensions industry has many decades of neglecting members,” says Tony Burdon, Chief Executive of UK-based pension campaign group Make My Money Matter. “One of the issues around member engagement is ensuring they have a better understanding of the impact of the scheme on the world around them. It’s also not just about listening to their views but responding. There is more listening, but most pensions funds are still not responding to member demand to ensure their pension is invested sustainably.”
Even when schemes incorporate measures to reflect beneficiaries’ views, the complex investment supply chain can still thwart trustees’ intentions.
The UK government took some action to rectify that imbalance this week with the Taskforce on Pension Scheme Voting Implementation (TPSVI) setting out plans to “encourage the people who invest pension savings – such as asset managers – to engage with their clients’ preferences about where their money goes”.
It added: “Currently, when pension schemes invest in pooled funds, they surrender their rights to vote at the annual general meetings (AGMs) of the companies they invest in. And until now, most asset managers, who are in charge of these pooled funds, have not always been prepared to engage with their clients’ voting preferences on issues such as climate risk management.”
The Taskforce’s recommendations included all asset managers offering asset owners the opportunity to set an “expression of wish” as to how votes are exercised on their behalf and that the Financial Conduct Authority should set expectations for asset managers around the better disclosure of voting policies and more granular and comparable reporting of how and why votes are cast.
There are encouraging signs that the pensions industry is moving toward a greater appreciation and understanding of beneficiaries’ views.
Back in March, Aviva Investors began a pilot partnership with impact-focused fintech Tumelo and a selection of its workplace pension customers.
According to Georgia Stewart, Chief Executive and Co-Founder of Tumelo, the aim of the project was to increase transparency and to ‘democratise’ stewardship.
Tumelo’s platform allowed individual pension members to see which companies their pension was invested into and express their views on shareholder resolutions on topics such as climate change or human rights ahead of the AGMs of portfolio companies.
The members’ voting data, also known as preference data, was anonymised and sent back to the fund manager and stewardship team so they could see how their members were asking them to vote.
“It is important to remember that those teams are the ones with the right to vote at AGMs,” Stewart says. “We are an ‘insight feed’ so they can understand how well they are aligning with members and how they might need to change. On those occasions when they do vote differently to members preferences, they will be asked to explain why.”
Pay ahead of climate
Tumelo launched a similar pilot model with LGIM in September last year, allowing 4,400 defined contribution (DC) members across eight pension schemes to learn, evaluate and express their opinions on pending shareholder proposals.
Between the launch and mid-2021, over 13,000 such proxy votes had been cast. It found that pay was the most voted-on issue, covering board remuneration and broader wage levels, with climate second, followed by rights (human and animal) and lobbying.
“As an individual DC member, you are really bearing most of the risk. It seems sensible that you would want to have more transparency and be able to influence stewardship activities that have been going on very much behind closed doors,” Stewart says. “Shareholder democracy means helping pension members and retail investors to get the best visibility on where their money is being invested and to have a voice on the ESG issues that matter.”
For the pilots, Tumelo served as a conduit between the members and the fund manager. These have now morphed into long-term contracts with LGIM and Aviva covering more of the firms’ workplace pension members. Another two pension firms are believed to be close to inking similar deals with Tumelo.
“Not every workplace pension scheme wants to be at the forefront of ESG,” says Stewart. “There are a lot of stakeholders involved from trustees to fund managers and members with different backgrounds and opinions. It is complex but the tide is growing in the direction of giving members a voice.”
UK auto-enrolment workplace pension scheme Nest says it has always had a clear focus on giving members a voice on investment priorities, but is also looking at broadening and digitalising feedback.
Nest, which has almost ten million members, runs an annual Voice of the Customer Survey covering a range of subjects includes members attitudes to responsible investment.
“Technology has got more exciting and there are more things we can do such as online/virtual roadshows where we could go around the country, gather members together and hear their opinions,” says Annie Bruzzone, Head of Investment Communications & External Media at Nest.
“We are actively exploring what more we can do to bring that transparency on our holdings to our members and then understand their preferences around voting.”
Truth to power
Nest already utilises members views when talking to corporates and encouraging them to ‘do better’ on certain issues. “We are bringing their voice to the boardroom,” Bruzzone says. “We have also shaped our Ethical Investment Fund around what members want included. We hope to use future information from voting technology and share that with fund managers.”
But beneficiary involvement in investment strategy also requires ongoing education efforts, especially for pension schemes such as Nest, where much of the process is already automated, requiring little active participation from members.
“It means more engagement explaining that they own a piece of that wind farm on the hill. By doing that we can then incorporate their views more closely in the future,” Bruzzone states. “Most of our members want to hear more and, at some point, we would like to invite small groups of members to come to AGMs. It is empowering to have a voice at the very top of these big companies.”
Charlotte O’Leary, Chief Executive of Pensions for Purpose, an impact-focused UK-based advisory group, believes the focus on voting democratisation has its limits.
“It’s been very difficult for trustees of defined benefit schemes to engage with members; you just don’t generally get the uptake because of the age demographic,” she says. “On the DC side you can get a better idea of what members want to see on ESG, but the sector is quite nuanced.
“But the ‘do you carry on investing or divest fossil fuels’ argument is difficult for academics to answer, never mind members. Trustees want to present what they are doing to members and get a sense of their views, rather than getting every individual’s opinion. It would be impossible to try and aggregate that together.”
Greater diversity on trustee boards, O’Leary suggests, might be a more effective means of developing ESG strategies that more closely reflect members views.
“If you had that you may not need to continuously seek individual members views. There would be trust in the trustees,” she says.
Tumelo’s Stewart agrees that there are many practical barriers to effectively reflecting members’ views on ESG issues and several stages to achieving greater shareholder democracy.
“Pensions ownership structures differ in who can vote or not, there are issues with poor IT systems and there are problems around not getting full representation,” she explains. “But if we can empower people to care more about where their money is going then maybe the next step is to have even more control around stewardship. But in the present, it is about getting them more engaged.”
Engagement requires better disclosure says Burdon, noting that Make My Money Matter has been calling on pension funds to publish the impact of their investments on the climate and rights.
“We want all that data to be transparent and in terms of democratisation that would allow members to gauge how happy they were or not with the findings,” he says. “They need a better way of communicating with members. With phone apps members could take action more easily either voting, indicating a preference or moving their money to more sustainable options.”
Stewart says she is encouraged by the Taskforce’s update and the UN Principles for Responsible Investment’s recommendation in April that asset owners learn about and incorporate beneficiary preferences.
“This is a growing space where it is clear that members want progression,” she says. “Technology providers are making it easier for fund managers to listen to views rather than seeing it as a massive operational burden.”
Despite that, she believes there is still room for regulation to encourage participation.
“If you don’t proactively engage members, then they just won’t do it,” she states. “It could be made mandatory to say that your scheme has a framework allowing member views to be heard and to advertise that to them. It needs a push but engagement and transparency is happening quicker than even we anticipated.”