The OECD should use the current financial crisis to step in and issue guidance to global pension funds on promoting sustainable financial markets in order to correct “systemic” problems that have led to an “unbalanced” focus on short-term rather than long-term investment, according to a major sustainability think-tank of investors. The group, the Network for Sustainable Financial Markets (NSFM), includes some of the world’s most high-profile sustainable investment supporters, including Bob Monks, a former administrator at the US department of labour and chairman of Governance for Owners, the activist fund manager, and Keith Ambactsheer, director for the Rotman International Centre for Pension Management at the University of Toronto, and an internationally respected pensions strategist. High on the think-tank’s list of proposals to the OECD is a recommendation to overhaul the pay of investment managers and consultants to reflect long-term pension objectives, rather than the current structure, which tends to pay on a short-term, flat-fee basis. The group was responding to an OECD public consultation launched last month on pension fund governance.In a challenge to the OECD, which has member countries from amongst the world’s 30 largest economies, the NSFM said it should react to the current market crisis by focusing on big picture issues common to institutional investors rather than its proposed remit on internal pension fund controls that can differ radically from country to country. It called on the OECD to broaden its investigation to examine the role pension funds, as major market participants owning approximately 40% of global stock markets, had played in “facilitating” the sub-prime crisis. Amongst the systemic problems, the think-tank cited a 2004 survey by US academics from the universities of Duke and Washington and the US National Bureau of Economic Research, which found that nearly 80% of corporate managers would sacrifice future economic value to manage short-term earnings to meet investor expectations. In another, it noted that fees for pension fund management had leapt without a corresponding increase in aggregate returns, citing a report issued this year by Watson Wyatt, the investment consultant, which said costs had jumped from 83 basis points in 2002 to 119 basis points in 2007.
The group also suggested that serious long-term issues including climate change and the risk of pension under-funding, notably for future generations, were issues that needed to be moved up the pension fund agenda.
Keith Johnson, programme director for the International Corporate Governance Initiative at the University of Wisconsin Law School, and the group’s spokesman, said: “Pension fund decisions now not only affect the best interest of fund participants, but most of our planet’s population.”He said the seriousness of the systemic issues was linked to the fact that institutional investors had become “market-controlling aggregations of capital”.
Amongst its recommendations, the NSFM said pension funds needed clarification of their fiduciary duty in regard to the debate over short and long-term investment goals. It also recommended that pension funds be required to make clear statements about their investment beliefs and how these would meet long-term liabilities, as well as report on potential conflicts of interest in the market.