Investing with impact summit - 10th october 2019

Representatives from Linchpin attended the excellent Investing With Impact Summit last Thursday.  Organised by Pensions for Purpose and DG Publishing, it was twice as large and lasted twice as long as last year.  It was probably the hottest pension fund date in town this year and didn’t disappoint.  Here are some of the learning points we took away from it. Impact investment has come a long way in 12 months.  We’d hesitate to say it was mainstream but there is an acceptance that pension funds can legitimately look for more than just a financial return.  The LGPS Funds seem to be in the vanguard of the movement. There are still arguments about what constitutes impact investment.  Is it enough for a company to be aligned with one or more of the U.N.’s sustainable development goals?  Or does it require an intention to make a positive or social difference, as per the PLSA’s definition?  And if the latter, can companies on the secondary markets truly be called impact investments? The scale of most impact investment is quite small, while pension funds with limited governance budgets want investments of greater scale.  We were struck by the number of smaller managers attending and the relative absence of investment consultants.  Given that they are often the gatekeepers to pension funds, are the latter missing a trick? We were also struck that the audience gender mix appeared to be at least 50% female.  It is a huge contrast to a couple of other mainstream fund manager events we have attended this year where attendance was 95% male.  There is a substantial good news story on several fronts, which is being drowned out by the howls of climate change protesters.  There is more to be done, without doubt, but the industry needs to make sure the world know what we are doing.  Otherwise we risk being seen as the enemy. Could we invite some of the crusties outside to join us next year? 

Complexity undermining good governance, says lgps advisor - room 151

William Bourne and his 'Too many fingers in the LGPS pie?' blog post quoted in this Room 151 article.

Too many fingers in the lgps pie?

The Scheme Advisory Board (SAB) commissioned review into LGPS governance was published a few weeks ago. The context is the increasing complexity of the Scheme as a result of legal changes (eg. the advent of pooling) and some clear governance gaps (eg. training requirements apply to Local Pension Boards (LPBs) but not the s101 Committees) and potential conflicts of interest.  The review by Hymans Robertson looks at four options ranging from simply improving practice to a legal separation of pension fund from administering authority.  It comes down firmly towards the former end of the spectrum, arguing that good practice can be found across a wide range of structures and so the latter is not a predictor of the former. The review explicitly focuses on outcomes.  It proposes putting in place four governance measures to achieve better ones: robust conflict management processes, assurances that the administering authority resources the pension fund adequately, a statement on how employers and members are represented, and regular independent governance reviews. So far, so good.  We all like a good outcome and these proposals aim to tackle the issues without imposing yet another layer of legislation and complexity on the LGPS.  Thus far, I commend it and I don’t have better suggestions to make.  One of the review’s other recommendations is to update and clarify the relevant guidance.  As one Officer is quoted, ‘Funds are currently pulled in too many directions by lots of guidance – CIPFA, SAB, TPA etc’. Just to make this point, the Local Government Association (LGA) has this week published a document entitled 'The LGPS Community' which describes the various bodies involved in LGPS decisions.  It is undoubtedly aiming to be helpful but the very fact that it lists seven different groups pinpoints what the problem really is.  There are too many fingers in the pie. Of the seven bodies described in detail, no less than four are supposed to assist or advise the s101 committees who administer each fund on behalf of the administering authorities (SAB, LGPC, the Technical Group and LPBs).  The document makes little or no mention of CIPFA, MHCLG, or The Pensions Regulator, all of whom create guidance or codes of practice funds are expected or obliged to follow.  This multiplicity of bodies, whatever the rationale behind the creation of each, is the underlying issue behind LGPS governance.  The outcome is grey areas in the guidance and advice which provide anyone who doesn’t wish to comply with an excuse not to.    As an example of this, The LGPS Community document provides the usual schematic of eleven bodies with, in pride of place and appearing to be the ultimate decision-maker, Local Pension Boards.  Anyone involved will know that that is a misrepresentation of reality, where LPBs have zero executive powers and almost no sanctions they can impose.  But, looking at this, it is too easy for other parts of the LGPS to pass responsibility on to LPBs. I wish the Hymans’ proposals well but to make a real difference somebody (the SAB?) needs to reduce the number of bodies involved in the LGPS.​

Is governance in the LGPS fully aligned with TPR’s viewpoint?

​Earlier this year Hymans Robertson was appointed by the Scheme Advisory Board (SAB) to facilitate a review of governance structures for the LGPS.  The major issues have been conflicts arising between the administering authority and the pension fund, often centred round the role of the 151 Officer legally responsible, and lack of clarity and accountability between different roles and stakeholders. It is quite clear from The Pension Regulator’s presentation at the PLSA conference last week that their understanding of accountability is different from the LGPS community.  TPR’s focus is on local pension boards (LPBs) – witness the fact that TKU requirements in the public sector code of practice (COP14) apply to board members but not the pension committee members who actually take decisions.  Given that LPBs have no executive powers and very limited sanctions, this cannot be right.  Either TPR in concentrating on LPBs has misunderstood how the LGPS works, or their focus is deliberate but misplaced.  Either way, it leads to two glaring loopholes in governance: LPB members are accountable for non-compliance despite having no powers and there are no training requirements for those committee members who do have the (delegated) powers. We welcome the Hymans’ Good Governance project.   In our view a good outcome will be to clarify the relationships between the various stakeholders managing the fund.  These are primarily the administering authorities, the 101 committees with delegated powers and pension boards whose role is to ‘assist’ the administering authorities.  However, equally important are the other stakeholders, the members whose pension money it is and the employers who bear the brunt of contribution changes. Hymans are looking at four models, of which we think three would be feasible.  We would like to see clarity of responsibilities and duties (and TPR’s COP14 fully aligned with whatever is ultimately decided) and processes for dealing with conflicts of interest.  Above all we would like to see effective remedies for poor performance, particularly as pooling and shared services are an increasingly common model.  In the private sector, one can always terminate contracts but that isn’t the case here.   Read more about Linchpin’s approach to advising on governance here.  

​Will AFM independent directors make a difference?  We look at a recent case study

The deadline for authorised fund managers (AFMs) to appoint independent directors is just over four months away on 30th September 2019.  In order to balance the interests of AFM investors and shareholders the FCA, in April 2018, implemented its proposal that all AFM boards should have a minimum of 25% independents. The recent spat over Woodford Investment Management’s transfer of £73m of unquoted assets from Woodford Equity Income Fund (WEIF) to Woodford Patient Capital Trust (WPCT) makes an interesting case study.  WEIF was a ‘forced’ seller in the sense that it needed to reduce its unquoted holdings to stay within the rules.  The deal was done at ‘fair value’, but sweetened for WPCT shareholders because WEIF paid 100% of nav for the WPCT shares they received in return for the assets as opposed to the approximately 20% discount in the market. WEIF, as an authorised open-ended investment company (ie. analogous to a fund but a corporate structure) is controlled by an authorised corporate director (ACD), Link Fund Solutions Limited, which receives a fee of up to 1% per annum for administering the company.  The ACD has six Directors, of which only one is non-executive and potentially independent.  WPCT is an investment trust falling under the usual corporate rules.  It has six independent directors. Both WEIF and WPCT’s investments are managed by Woodford IM, so the potential for a conflict of interest is clear.  Shareholders of both companies were concerned by the deal.  WEIF shareholders were worried that they were investing in WPCT shares at 20% higher price than they needed.  WPCT shareholders thought they might be being stuffed with stale WEIF assets at high prices. Our point here is not that the deal was bad for either company or that Woodford IM has behaved in any improper way.  The price may indeed have been a fair one, and the deal good for both WEIF and WPCT.  Our point is that neither company were able to provide shareholders with any real assurance that their Directors had looked after their interests.  After being pushed, WPCT’s chairman commented that “The Board sought advice from a range of parties and had the companies, which we already own and know well, independently valued.’  The ACD made no comment to WEIF shareholders but Woodford IM commented ‘The potential conflicts of interest have been thoroughly assessed and managed in terms of both sets of shareholders, not just by Woodford, but by all parties involved in the transaction.’  At Linchpin, we don’t think either of those comments add to anything more than unverifiable assurances.  They are not good enough. The question then arises whether independent Directors in place at WEIF or Woodford IM would have made any difference to WEIF shareholders.  On the evidence of WPCT, they might still have been fobbed off with a bland assurance.  But independent directors would at least bear some accountability for protecting shareholder interests and could be questioned at AGMs.  We view that as an improvement.  One final comment: we are aware that some AFMs are simply going to past executives to fill the new positions.  We rather doubt that they will be perceived as truly independent.  The need above all is for someone who can bridge the gap between investment and governance but with an independent mindset.  We can think of people who fit that description well.   To find out more, please click here.​

Exclude or be a responsible investor? You can't be both

Responsible investment – ie. nudging (or more) investee companies towards sustainable business models - is at the heart of modern institutional share-ownership.  It relies on being a shareholder in a business, which is why many investors in the LGPS and elsewhere state in their investment policies that they prefer to engage rather than to exclude.  Shareholders who care are more likely to persuade companies to alter their behaviour than those who don’t. In contrast, charities tend to exclude companies whose activities are opposed to their own objectives, and campaigners put pressure on other investors to exclude sectors such as tobacco, armaments and fossil fuels.  The argument is that if demand for a share is lower, the price will fall, making it more expensive for the company to raise money through bond and equity markets (and incidentally sending executive share options into negative value). At Linchpin we see some significant inconsistency here.  If you don’t own alcohol shares, for example, how can you influence them to behave better?  If you don’t own oil shares, why would they listen to your views about climate change?  Are companies such as Sports Direct going to listen to non-shareholders? Reality is of course not black and white.  There are some activities which are generally beyond accepted social acceptance and sometimes banned by international conventions (eg. some kinds of munition manufacture).  Exclusion is hardly controversial here: the question should be why a listing authority permitted the company to list. For charities with a specific focus, there may well be justifiable concerns that donors will be put off.   Could an anti-tobacco charity hold a tobacco company?  We would still argue it will have more influence from the inside but the reputational risk argument may understandably carry more weight with its trustees. At Linchpin we are firm believers in investing responsibly and we would challenge those who exclude simply because it’s easier.  The effect of exclusion on companies is often to push them towards becoming private again.  They may then be out of sight but their behaviour won’t have changed.  We think responsible investment, and here we mean engagement, is both more likely to effect change and add value.  Compared to exclusion, that is win-win for investors. Our message for investors would be to consider carefully the reasons for any exclusions.  Find out how Linchpin can help you here.​

Is your organisation really smart?

I attended an interesting breakfast seminar at the consultants, Redington, last week about minimising mistakes. The starting point was that ‘stupid people don’t learn from their mistakes; smart people do; really smart people learn from other people’s mistakes’.  Two speakers, from KKR and 24 Asset Management, gave a short description of what they had done to make sure their organisations fell into the last category before a more general discussion.  Some of it is fairly obvious, at least to those of us who have been around for 30+ years: it is largely cultural and has to be led from the top; owning up to mistakes should be encouraged, not penalised, so long as the knowledge gained is shared; senior people should go out of their way to give time to dissenting views and always speak last at meetings; diversity of decision-makers is good; careful analysis both beforehand and afterwards (was the decision a good one?) is helpful. However, it is much easier said than done, particularly for younger organisations and staff.  The hard question came from the audience: if a junior employee makes a mistake which costs the business money, but owns up to it and shares the lessons learned with their colleagues, what do you do with their bonus?  Reduce it on the basis they made a mistake?  Leave it alone, on the basis that they behaved well?  Or increase it as a signal to encourage colleagues to learn from the mistake. One shared conclusion was that the behemoths among us, whether civil service or investment bank, don’t usually fall into the very smart category.​

Linchpin wins new business

We are delighted to announce that Linchpin has recently signed two new contracts.  William Bourne has been appointed after a public procurement as one of two Independent Advisors to Teesside Pension Fund for a six year contract.  And we have separately been appointed to provide advice to the General Pharmaceutical Council on an investment governance project which they are undertaking.  We are pleased to be working with both these prestigious clients to assist them with investment and governance advice.​