AE providers slammed for stewardship and responsible investment failings

ShareAction CEO Catherine Howarth
Auto-enrolment pension providers have been slammed for failing to put a pension saver with assets in the scheme on their board and for delegating virtually all responsibility for stewardship to asset managers.
A hard-hitting report from pension scheme member pressure group ShareAction has identified a gulf between best and worst performing auto-enrolment pension schemes in relation to transparency, governance and responsible investment performance.
Then report sees Aviva come out top, with a score of 39 out of a possible 80, with Standard Life’s contract-based scheme second on 37 followed by Standard’s master trust in third on 36.
Aegon scored 32, Nest polled 27, L&G’s master trust and contract scheme both scored 23,  while Now: Pensions achieved 17 points, Royal London scored 16, with Scottish Widows on 13 and The People’s Pension last of those surveyed on 4.
The report found Most schemes do not disclose investment policies to customers on their customer-facing websites, raising questions as to how these pension providers scrutinise their asset managers and hold them to account on behalf of savers said Share Action.
The report, Reclaiming Ownership, covers nine pension providers with £1.9trillion in assets under management. This is a sizeable proportion of the £3trillion life insurance companies and pension funds market in the UK.
Historically UK pension schemes have had at least one third of their boards made up of Member Nominated Trustees whose own retirement savings are in the scheme concerned.  Share Action says given the significant problems over the last decade with conflicts of interest, poor service and value for money in the contract-based side of the UK’s pensions market the lack of pension savers with ‘skin in the game’ on the boards of the UK’s major auto-enrolment providers is troubling.
The report says the problem of weak oversight is particularly severe when the asset managers are third parties and not part of the same firm as the provider. Only five of the providers require evidence of stewardship capabilities when selecting external asset managers. Only two of the providers surveyed, Nest and Aviva, have issued statements of compliance with the UK Stewardship Code as asset owners.
NEsr, the government-backed auto-enrolment provider, got the best score on governance. NEsr and Now: Pensions both have a member panel with more formal roles in the governance structure, although neither has a member on its board. Aegon, Standard Life and Aviva have established customer hubs or customer research communities.
While the research finds some emerging best practice, overall the report concludes that communications and accountability to members “still fall way short of what is needed to overcome the public’s widespread lack of trust and understanding of the pension sector.”
It also highlights a wide variation on how the schemes are integrating social, environmental and governance risks into their investment strategies.
The report says the criteria on which employers select a pension provider tend to focus on the cost to them and the ease of setting up a scheme and says there is a serious risk that members’ best interests will not be the determining factor by which pension providers succeed in winning market share over the next crucial years of the auto-enrolment journey.
Aegon is the only company to have a clearly disclosed policy of avoiding companies that manufacture weapons banned under the Inhumane Weapons Convention, such as cluster munitions. Aegon’s parent company is in the Netherlands where it is illegal for pension funds to invest in such firms. In the UK there is no such law, and there is no guarantee that funds are not invested in the manufacture of these controversial weapons.
Four of the providers surveyed – Legal & General, Royal London, Nest and The People’s Pension – do not provide any public information on how they invest in arms in their default funds.
Only four providers – Aviva, Nest, Standard Life and Legal & General – describe the need for companies’ remuneration policies to be linked to the long-term financial success of the company. None of the providers’ policies expect companies to provide their shareholders with comprehensive reporting on tax policy and taxes paid in different jurisdictions. Since 2008, corporate tax avoidance and executive remuneration have consistently been ranked as the top two issues that concern the public with regard to corporate behaviour.
On climate change, Aviva got the highest score. Only Aviva, Aegon and Legal & General state that they invest in companies or projects that support the transition to a low-carbon economy and emissions reduction in the economy as a whole, a finding described in the report as “concerning”.
The report says many providers do little or nothing to find out which investment issues their pension savers care most about. Only Standard Life surveys members of its default auto-enrolment fund on their views on investments. None of the providers give information in their annual statements to members about what they are doing to invest their savings responsibly with regard to environmental and social issues.
ShareAction chief executive Catherine Howarth says: “At a time when thousands of employers in the UK are figuring out what pension provider to select for their workforce, we’re pleased to release information that will help employers make a choice that is guided by the long-term needs and interests of their staff. We’ve looked under the bonnet at the investment policies of the UK’s dominant players in auto-enrolment and found a serious gulf in performance between the best and worst when it comes to managing conflicts of interest, good governance and responsible stewardship of assets. These factors will make a huge difference to UK pension savers over the long-term.”
ShareAction senior policy officer and one of the report’s authors Camilla de Ste Croix says: “We’re proud to have produced the first independent benchmarking survey of auto-enrolment pension providers, particularly as it’s not always easy to find out how and where pension savers’ money is invested.  Although we found much room for improvement across the board, we also found that there is plenty of best practice that pension providers can draw on if they want to know how to improve. Whether looking at their peers at home in the UK, or oversees, particularly to the Netherlands, joining collaborative investor initiatives or making use of the many emerging international norms and standards its easier than ever for pension providers to invest more responsibly.”
Daniel Godfrey, former Chief Executive of the Investment Association, says: “Nobody has longer-term savings objectives than members of auto-enrolment pension savings arrangements. ShareAction’s report should encourage all investment managers to support companies that have long-term strategies. Real long term thinking requires serious approaches to human capital development, research and investment. It also means supporting – and if necessary, requiring – companies to look after the environment, pay their fair share of taxes, lobby governments with integrity, and address pay inequality and diversity. ShareAction is reinforcing the importance of long-term investment approaches to pension scheme members, to companies and to the economy.”
Jill Rutter, a Scottish Widows pension customer, says: “This research from ShareAction will help employers make more informed choices about which pension provider to use, and is a valuable resource for savers too. It’s really hard to find information about where your pension savings actually go, and not enough providers are taking the time to actually find out what their customers think. I am concerned about climate change and don’t want my savings to be invested in companies with high-carbon business models. Having this information publicly available puts pressure on all pension providers to take a more responsible approach to their investment practices.”