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The lobby group fighting to make pensions fair

Alex van der Velden, executive director of FairPensions talks disinvestment, defined contribution, and benchmarking pension funds and asset managers for sustainability.

Responsible Investor: Can you give us a flavour of who FairPensions is and what work you do in influencing pension funds?
Alex van der Velden: FairPensions was launched at the end of 2004 by a group of NGOs (i.e. Amnesty, Oxfam, WWF) who wanted to learn more about the City of London and how to influence it. I became involved in December 2004, at the time having nothing more than a business plan written by these NGOs to specifically influence pension funds. I’d previously worked in the investment world with JP Morgan and a couple of other organisations and really wanted to do something that was a little more sustainable and ethical.
The business plan was very NGOish. It relied on fairly heavy-handed tactics and traditional NGO scare approaches, which doesn’t really work very well in this sector because people are very conservative about their money. We realised very quickly we needed to adopt a different model and so last year we moved towards a dialogue and benchmarking strategy.We analysed the 20 largest UK pension funds on transparency and compared them to each other. We didn’t come up with a list of unachievable targets – we set a standard benchmarking project. The outcome was that UK pension funds weren’t generally being very transparent, not even including environmental and social issues. What’s interesting now is that many of them are becoming more transparent and, of course, with the problems that occurred with the credit markets this is being seen as relevant beyond ethics or environmental issues. People have realised this is a systemic risk having billions of assets in pension funds not being overseen by anyone including their own members because they don’t have the right information.
Responsible Investor: What do you think is holding pension funds back from taking a responsible investment approach?
Alex van der Velden: Pension funds do seem to be coming round to a different view on fiduciary duty. When the Freshfields report came out two years ago there was
a lot of people who were very sceptical about it and looked back at the Cowan versus Scargill legal judement which said they couldn’t take account of these issues because they weren’t financially relevant. Pension funds are starting to move on from that and having done their homework they are starting to see that these issues are financially relevant and so it becomes a fiduciary duty. What’s holding the pension funds back is the assumption that it isn’t financially relevant. Certainly when you look at the investment level, one step down from the administrators, there is a deep scepticism that remains that making any changes will impact heavily on their daily lives. One reason that doesn’t happen is because they are all motivated on a short-term basis. It’s very difficult, from a human behavioural standpoint, to get a fund manager that is interested in an annual bonus to take an interest in a long-term issue like climate change. Other than perhaps as a driver of business models or theme-based investing, they are not really going to be concerned about investing in a company with huge carbon emissions because there is no near-term impact. That’s what fund managers who are not involved in socially responsible investment will tell you. The incentive structures are wrong and that’s why long-term issues get dismissed.
Responsible Investor: Aren’t these issues really the responsibility of governments and regulators, not pension funds?Alex van der Velden: Governments have a very clear role to play, but the difference for pension funds is that they ultimately manage money that belongs to a wider set of stakeholders, and in the case of some of the larger funds that money belongs to the general public, which does care about these issues. If you’re now in a situation where the research shows that it’s financially relevant and that these are financial risks for the schemes, and you have a situation where the members are concerned about these issues, then it becomes very relevant for the scheme to be clear about this have thought about these issues.
Responsible Investor: How successful have you been in persuading pension funds to change their approach and can you give any examples?
Alex van der Velden: What’s very interesting is that the approach of getting pension funds to compare themselves with each other has been a huge catalyst for change. To date I think the tally is that we have persuaded about £820bn of investment capital to adopt responsible investment practices. What does that really mean? It means you have groups starting to disclose their voting records for the first time and disclosing their investment holdings. That starts to introduce the level of transparency which will bring accountability, not just to the public, but to pension fund members. In an information vacuum there can’t be any oversight.
Responsible Investor: Where do you stand on the engagement versus disinvestment debate? Is there a sense that pension funds could be using engagement as a ‘fudge’?
Alex van der Velden: “It’s a very interesting issue. Disinvestment is something that UK pension funds for example won’t even contemplate. They are very very afraid there is a slippery slope and say how much of the investment universe would you have to ultimately disinvest if you took one such decision. A good answer to this is the Norwegian Government Petroleum Fund, which has a total of 19 companies they have disinvested out of a portfolio of about 4000 companies. That is statistically irrelevant. People who say: we cannot disinvest because of reduced diversification, we consider that wrong because it doesn’t hold up in terms of logical arguments. There are areas that are so controversial that engagement doesn’t work because you can’t change, for example, a company that makes its money producing landmines. In these cases disinvestment is surely an easier option for getting rid of the pressure. It’s in the grey areas where people can’t decide on a black and white approach that engagement policies come in. The problem is where engagement simply becomes, as you say, a fudge and where people have these glossy reports but can’t actually point to any outcomes from their engagement. I think that as civil society organisations become more sophisticated they will start to look beyond glossy brochures to see whether the engagement has an impact. If it isn’t then why are we doing it and shouldn’t investors be thinking about disinvesting? It’s either then too much of a reputational or financial risk for the portfolio.Responsible Investor: “You’ve said there is a lack of responsible investment offers in the defined contribution area. Can you explain what you mean by that?
Alex van der Velden: We do get a lot of questions from people about how they can invest more responsibly. One of the difficulties in the DC scenario is that often the responsible investment option is usually an ethical or screened fund. That isn’t the sort of product that has a wide appeal because it depends on the values of individuals – some may not be invested in tobacco or arms, or may focus entirely on clean technologies. The reality is that what you need is a broad fund offering that in general has a layer of responsible investment principles on top of it.
Responsible Investor: You come from a private equity background. How responsible do you think the asset class is for pension funds?
Alex van der Velden: The private equity area has become very controversial this year because the unions have very logically made a point that if you go in and buy a company, strip its assets and fire lots of people and that’s how you drive the return, then that doesn’t have a long-term beneficial impact on the pension funds that are investing in those companies in the first place. The conflict is that the pension fund sponsor may themselves be victim to a private equity acquisition that weakens the pension fund and potentially destroys the jobs of some of its contributing members. If on the one had you are supposed to be looking after your members’ best interests, as defined by law, and on the other hand you are investing in asset classes that may be undermining those – directly or indirectly – then there is a conflict
there. I don’t think anybody is thinking about it in these terms. Private equity has something to answer for. Much of what the industry does is financial engineering, although the industry won’t admit to that. You’re riding on a system and you’re not necessarily adding any value, in fact it is the opposite. I do, however, think there is a growing sophistication amongst pension funds to see the difference between groups that are genuinely creating value by buying and expanding companies and those that are just out to flip them for a quick buck.
Responsible Investor: “In an ideal world what do you think pension fund should be doing for responsible investment?”
Alex van der Velden: The starting point is that there should be acceptance that as a large institution there is a public responsibility, which goes beyond just the members. What follows should be a far more sophisticated and responsible shareholder base.We’d like to see all pension funds have people looking out for the issues within their portfolios, actively engage with companies where there are risks and that they have the resources to do so effectively. That isn’t the case at the moment because this is not an area where people feel they need to invest resources. We’re some way off that but we are seeing a lot of progress. In terms of fund managers, where we also work, we have to go even further. At least pension funds accept they have some broader societal responsibility. Fund managers will nto accept they have one. Even when you point out that it is ultimately public money they are managing they will say to you: we don’t sign contracts with the public, we sign them with the pension funds. It’s a very old fashioned excuse. Multinational companies are much more aware today that have a corporate social responsibility. The finance industry is very far behind that, and that is the big challenge.