‘Forceful stewardship’ critical for defined contribution schemes – UK pension body PLSA/Sustainalytics

Term coined by Thamotheram and Covington picked up by PLSA

‘Forceful stewardship’ – the term coined by Raj Thamotheram and Howard Covington – has been picked up by the main UK pensions body the PLSA to help frame the debate around integrating environmental, social and governance issues into defined contribution schemes.

Thamotheram, CEO of Preventable Surprises, and Covington, the former New Star Asset Management CEO, introduced the term in 2015, defining it as “the willingness of investors to use their votes to request, in a non-prescriptive manner, constructive and value-enhancing corporate actions”.

In a series of papers they said: “Possible action includes voting for resolutions to change constructively the business strategies of the companies in which they are invested, particularly the fossil fuel companies.

“The resulting collective action problem may be solved if pension scheme members and other beneficiaries test legally the obligations of their investment fiduciaries in this regard. We call this assertive approach by investors to taking action to reduce climate risk ‘Forceful Stewardship’.”

Now the term has been picked up in a new discussion paper looking at ESG in default DC funds, written by Sustainalytics’ Doug Morrow and published by the PLSA, the Pensions and Lifetime Savings Association, and Sustainalytics.

“Forceful stewardship,” the report says, “is a critically important part of minimising ESG risks for DC schemes and can deliver a range of short- and long-term benefits, including financial, knowledge and signalling value.”Asked by RI to define forceful stewardship, report author Morrow, an Associate Director on the Thematic Research team at Sustainalytics, said it referred to “advanced strategies on voting and engagement and use of ownership rights”.

The research said a typical default fund offered by DC schemes in the UK has a 71% allocation to equity and is most heavily tilted towards banks (7.7%), pharmaceutical companies (6.4%) and oil and gas firms (6.0%). DC schemes in the country operate in what is arguably the world’s “most sophisticated stewardship market”.

The PLSA, which rebranded from the National Association of Pension Funds (NAPF) in 2015 partly in recognition of the growth of DC, says the number of savers in DC workplace schemes in the UK is expected to rise to 17m — with assets potentially rising to £914bn (€1.1bn) by 2030.

DC schemes, the report says, could also benefit by “fully embedding stewardship capabilities into their process for selecting managers”.

But there are barriers to this, not least the fact that small workplace schemes are likely to outsource voting and engagement to external managers and the fact that investment via pooled funds “makes it difficult to exercise voting rights”.

It also noted that some schemes, such as NOW : Pensions “use derivatives that do not convey voting rights”. NOW : Pensions, which is owned by Danish pension giant ATP, has clients including shipping firm P&O, recruiter Adecco and publisher IPE.