The Association of Member Nominated Trustees has renewed its call for the Financial Conduct Authority to act on “a market failure”, saying that pooled fund managers must stop preventing pension schemes from implementing their own voting policy by refusing split voting. 

 

The association sent a complaint to the FCA in May this year, asking it to act on pooled fund managers which do not allow asset owners to apply their own voting policies, claiming that this amounts to a market failure. 

 

In late 2017, the association asked 35 fund houses whether they would accept a trustee-owned voting policy such as the AMNT’s Red Line policy, from their clients. Ten failed to respond, and the remaining 25 “showed a near total unwillingness to split votes in pooled fund holdings”, the AMNT said in May. 

 

It also reviewed the voting policy of 42 fund managers on issues such as climate, diversity and executive pay, and found that these were not sufficiently clear or stringent to replace asset owner policies. On climate change, for example, four did not publish their voting policies, while more than half of the remaining 38 did not mention to climate change. 

 

In 2018, around a third of pension fund assets was in pooled funds, according to the Investment Association, and the proportion is higher among local authority schemes. 

 

   

Janice Turner, founding co-chair of the AMNT, said the association has to date not heard back from the FCA.  

 

This could change soon though, as the Treasury select committee has included the AMNT’s complaint in its decarbonisation and green finance inquiry. Interim chair Catherine McKinnell wrote to the chief executive of the FCA earlier this month, asking what action the regulator has taken on the AMNT complaint.  

 

Turner said she is looking forward to reading the FCA’s response, which will be made public. “It won't be good enough for the FCA just to say that the market will decide,” she noted. 

 

 

The letter by the Treasury select committee chair was sent in the same month as the Financial Reporting Council published a revised UK Stewardship Code. 

 

Signatories to the code pledge, among others, to “take account of client and beneficiary needs and communicate the activities and outcomes of their stewardship and investment to them”. The code requires signatories to disclose their policy on allowing clients to direct voting in segregated and pooled accounts, but not to allow it. It will come into effect in January 2020. 

 

Next year will also see the implementation of the EU’s revised Shareholder Rights Directive, which was transposed into UK law in June without any preceding consultation.  

 

Under the new law, pension funds will have to “incentivise” asset managers to align their investment strategy and decisions with the trustees’ policies, but it is unclear how this can be done within a pooled fund arrangement. 

 

The argument is sometimes made that if enough investors ask the pooled fund manager, it will eventually succumb to pressure, but Turner has her doubts.  

 

When she first enquired about separate voting in pooled funds seven years ago, managers’ response was that there was no demand for this, she said. Since 2016, “we have reason to believe that quite a lot of schemes have adopted the Red Lines and started sending requests to fund managers to implement them, and yet again they couldn’t”. 

 

Turner said it is “ironic” that pension funds are facing growing pressure to exert their shareholder rights but are denied this right in many pooled funds.  

 

She does not accept any administrative or operational issues that split voting might create. “It’s the year 2019,” she said, noting that technology should be able to overcome such hurdles. 

 

But investment professionals are more sceptical. Simeon Willis, chief investment officer at consultancy XPS, said reflecting investors’ preferences when voting in pooled funds has a number of “significant” practical challenges, and that there is therefore scope for improvement – but that the key is to find a manager whose own voting policies are in line with the pension fund’s. 

 

"With pooled investing all investment decisions are usually delegated to the manager so it is complex to attempt to reflect pooled fund investors’ individual voting preferences,” he said, adding that “the primary issue is finding a manager that is pursuing an overall strategy that is in keeping with the trustees’ desired approach, and the voting will then naturally reflect that”. 

 

 

Voting is a key part of environmental, social and governance implementation. Rachel Haworth, UK policy manager at campaign group ShareAction, said: “Without the ability to vote on the shares they own, asset owners cannot put into practice their ESG policies.” 

 

In addition, conflicts of interest can arise where asset managers invest in the same companies as their clients, and by not implementing the client vote, managers allow the conflict to “play out”, she said.  

 

“The situation is that trustees have the responsibility, but asset managers have the power, and this ultimately leads to a market failure which should be corrected,” she noted. 

  

The new Stewardship Code represents “a big step forward in many ways”, but still only requires signatories to disclose their policy on whether or not they allow pooled fund investors a separate vote – and, “since large asset managers are currently saying that they will not accommodate split voting on pooled funds, we don’t anticipate that the new Stewardship Code will be enough to change this”, Haworth added. 

 

The FCA and a number of major asset managers were contacted by mallowstreet for comment; no response was received by press time. The Department for Work and Pensions and the Treasury select committee declined to comment. 

 

Gerald Wellesley