The UK government has announced in its response to the consultation on principles of operation for UK pension schemes proposed by Paul Myners that it will legislate to incorporate the US ERISA principles on shareholder activism into UK law. This would make it a duty for fund managers and pension scheme trustees to intervene in companies if it is in beneficiaries’ best interests.
The ERISA interpretative bulletin that the government refers to states that “activities intended to monitor or influence the management of corporations in which the plan owns stock are consistent with a fiduciary’s obligations … where the fiduciary concludes that there is a reasonable expectation that such monitoring or communication … is likely to enhance the value of the plan’s investment”. The proposal raises the prospect of pension scheme trustees having to spend much more time dealing with ‘ethical’ issues and even meeting with company management. Is this likely to happen?
Experience in the US suggests that there will be little influence on defined contribution pension schemes. A key concern that US fiduciaries of 401(k) plans have is to avoid being sued by plan members who have a reduced pension as a result of actions taken by the fiduciary. The fiduciary’s typical response is to widen the range of investments available and to give members full choice over the assets actually held within the plan. Fiduciaries provide full information on the range of investments. They also act quickly to remove underperforming managers.
There is little shareholder activism. 401(k) plans are run within a cost ceiling with a company fiduciary, in a similar way to the stakeholder plans introduced in the UK from 8 October. Limiting the amount fund managers can charge discourages greater activity. Moreover, there is a get-out clause in the interpretative bulletin allowing the fiduciary to offset the cost of carrying out its intervention against the expected increase in value of the stock.
For large defined benefit (DB)schemes the experience may be different, but many of these have already taken steps to implement policies on corporate governance, following a change in regulations under the Pensions Act 1995 requiring schemes to state their policies on the exercise of rights attaching to investments. Certainly all major fund managers now publish and maintain corporate governance policies. In many cases, of course, these reflect a non-interventionist policy on the basis that it is in beneficiaries’ best interests to sell a stock when there is something wrong with the company.
Whatever attention is paid to this new requirement is likely to be restricted to large DB schemes simply because smaller ones are unlikely to be around. Many UK employers with smaller DB schemes have started to wind them up or are considering doing so. The likely response of many employers is to set up stakeholder plans. The Myners principles, and hence the ERISA principles on shareholder activism, do not apply to corporate fiduciaries, only to trustees.
Brendan Reville is investment director of Gissings in London, part of the Asinta network

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