Institutional investors eager to take on pay at the top have so far been silent on pay at the other end – but low pay is moving up pension funds’ governance agendas.
Pay differentials have sneaked their way into the current UK political debate via bosses’ pay. Under orders from the government, Britain’s business ministry is currently conducting a review of corporate governance that will include executive pay disclosure. Meanwhile, a thinktank, the New Economics Foundation, is demanding that pay ratios appear on the front of companies’ annual reports.
The £5.1bn (€5.8bn) Merseyside local authority pension scheme in April went public on the pay issue, announcing that it would vote against excessive remuneration deals in the hope of setting a precedent for other investors.
But the concomitant of excessive remuneration – low pay – has hardly been the target of investor scrutiny. In contrast to underpaid unskilled work at the bottom, executive remuneration involves newsworthy numbers.
“Especially in the financial sector, lottery number pay packets have grabbed the headlines,” says Fair Pensions’ engagement director Louise Rouse. “In contrast, low pay happens under the radar – at a level of the company pension fund investors aren’t necessarily looking at. They need to see it, preferably in black and white.”
Given the existence of a national minimum wage, low pay in theory shouldn’t be a particularly shocking. Hence Fair Pensions’ ‘living’ – as opposed to ‘minimum’ – wage campaign.But Li Qiang, executive director at China Labour Watch, a New York-based organisation that campaigns for better pay and conditions, claims that even where the abuses are self-evident and the welfare safety net is absent, there’s little evidence that investors care either way.
“In my experience, most investors don’t care how much Chinese workers are paid,” he says. “One reason could be because many investors invest in the suppliers, rather than in the factories that abuse labour rights. Where they have engaged with Chinese companies, they could have a significant effect in raising labour standards, but I’m not optimistic that low pay and labour abuses will move up the agenda.”
Even in economies with labour law safeguards, low pay doesn’t go to the vote – though that will likely change. The fact that pay ratios appear in the UK’s corporate governance guidelines – which require “sensitivity” to pay elsewhere in the group when remuneration committees determine executive salaries – gives a fillip to pension fund investors concerned with pay as a governance issue.
“Decent labour standards are a proxy for the quality of a company’s management,” said Owen Thorne, investment officer at the Merseyside scheme. But he points out that governance discussions are often taken up by technical issues, such as company reporting and how the remuneration committee works, rather than how much the lowest paid staff earn.
In any case, voting isn’t the endgame.“Making low pay a voting issue is part of it – but only part of it,” says Ken
MacIntyre, manager of the Unite staff pension scheme. “Pension funds need to be making representations as investors. They don’t have to wait for the AGM.”
Yet it isn’t necessarily clear who should be leading the charge. Tom Powdrill, head of communication at PIRC, which advises many UK local authority pension schemes on governance issues, claims the outsourcing of portfolio management is one of the main reasons why institutional investors have failed to act on low pay to date – because external managers have nothing to gain by raising it.
“When fund managers are acting for shareholders, they may just be focusing on short-term performance, rather than on long-term issues,” agrees Thorne. “So it can be quite powerful for pension funds to engage directly, and to have immediate meaningful long-term conversations with companies.”
Consultants declined to comment on their potential for involvement on the issue. So who’s left? The impetus for the Unite pension fund to sign up to the living wage came from trustees. “I’d say that it should come primarily from trustees who are the owners and investors,” says MacIntyre. “It wasn’t difficult to get the trustees behind the campaign because it’s aligned with our policies and objectives as a union. There’s no conflict with the trustees’ own views, which made it easier.” Fair Pensions recently wrote to the UK’s 100 largest pension schemes to urge them to sign up to the Living Wage Campaign. The uptake to date has been from union pension funds, including Unite – which have, as it were, skin in the game – and faith groups.Outside of these investors, Rouse points to the complexity of a relationship between a pension fund sponsor and the pension fund holding that sponsor to account.
This reluctance for some companies to engage comes as no surprise to Thorne. “When we discuss pay, we’ve been trying to broaden out the discussion to pay structures and incentives – rather than just focusing on what the top people get paid. It’s proven to be challenging, to put it mildly,” he says.
“Companies tend to act defensively when shareholders come to them to talk about pay but we also thought it was a good way to see what companies are doing on a positive basis.”
Few other pension schemes have taken Merseyside’s cue and gone public. “All it takes from pension funds is representation – and for pension funds to leverage asset managers and fund managers,” says MacIntyre. “The thing is, most pension funds are small. For the campaign to be effective, it needs to target larger ones, and for there to be coordination across union pension funds. That is already starting to happen.”
If and when they do engage, chances are it won’t be with flags flying. “Fund managers and asset owners have both told us that they’re undertaking dialogue on the issue – but not publicly,” says Rouse.
“Would we prefer public support for the campaign? Yes of course we would: it creates a sense of momentum within the investor community, as it has around climate change. But even if it isn’t public, serious, considerate engagement has to be a good thing.”