I was at the 2015 Workers Capital Conference today, meeting with union pension negotiators and trustees from across the world. There is great best practice that we need to learn from, but also recognise that funds are invested internationally. We are investing in each other's communities and economies. Pension funds own half of the assets in the world and we should act collectively.
The first session looked at the role of trustees and shareholder activism.
The Californian teachers pension fund had some good advice for union pension trustees. They distilled these into seven effective ways of working.
- No place for fear. Don't be intimidated by the experts and hand over your fiduciary duty to the 'money people'.
- Stay curious. Be inquisitive and don't be afraid to ask questions.
- Be unwaveringly ethical. Remain true to those you represent. Without this funds are vulnerable to manipulation.
- Think objectively. Not enough to know what to do, be ready and willing to share views.
- Work hard. Read the materials, understand best practice. But recognise there is never enough time to do everything.
- Keep focused. Money managers are skilled at distracting trustees.
- Listen first. Speak less and listen more. Intervene at the right moment, don't just follow the money managers.
The Dutch pension fund ABP talked about shareholder activism. Examples included tackling poor labour conditions for textile workers in Bangladesh and Burma. Lack of safety standards and resolving the 'leukaemia dispute' at Samsung. Anti-union practices at Walmart. The latter resulted in four years of work before divesting. Their strategy involves intense dialogue, asking key questions and site visits. Sanctions included voted against directors remuneration and finally divestment, but only when all else fails. All of this is much more robust than the sort of ESG engagement advisors in Scotland pursue.
The U.S. Bakers union have a similar strategy through their capital stewardship programme. Part of their organising department because they see this work as building the union. Companies with good governance perform better, particularly those who treat their workforce fairly. They work with other funds collaboratively to target specific issues and sectors, particularly retail companies. An example of their engagement was the retail firm GAP, promoting a living wage and a good jobs strategy.
While there were different views on priorities, there were some common issues. Infrastructure investment to boost the economy (but not PPP), climate change and workers rights are probably the three main ones and there was support for some broad common goals. Pension funds are long term investors and there was an interesting debate about the pace of change funds should expect from the companies they invest in. Fiduciary duty shouldn't be a barrier to achieving common union goals.
The second session looked at pension fund management and transaction costs. The best approach is the Dutch model who have a level of understanding and transparency that we should aim for. Scottish funds have very little grasp of the true transaction costs of their equity investments. The Dutch now have legislation regulating this approach and this includes an asset management contract that is reducing costs.
Unsurprisingly, commercial asset managers in the UK resist this approach - even those who can do it in The Netherlands, because they have to! There is no good reason for telling us what something costs - if they can't tell you don't buy their services!
We probably only know about one third of the real costs. They are much higher than we think, probably three times higher at least. This matters when pension funds are under financial pressure. When resources are tight we should look closely at costs. It is also a fiduciary duty on trustees to know the true costs of their scheme, so they save contributions, not pay for profits.
Cutting costs is best done by bringing services in house. The top performing LGPS schemes in the UK are largely delivered by in house teams, cutting out the rent seekers. Active fund management is an illusion to fool us into trading that makes huge profits for the asset managers and hedge funds. It was interesting to hear that even New York public pension funds are coming to the same conclusion about active fund management.
The lessons for Scotland are that we should introduce systems that make real costs transparent, bring services in house, and largely get out of active fund management. Another lesson is that size matters and we should pool assets.
A lot of these issues appear complex to the average union trustee. But the value of today's conference is the sharing of information and developing common approaches. There are few more important issues than our member's pensions and there is much to do.