The UK’s investment management association has unveiled an action plan aimed at boosting long-term investment to solve the country’s “productivity puzzle”.
Its proposed actions include working with the UK pensions regulator and industry association to improve stewardship, as well as investigating whether pension funds are being forced to de-risk too much.
The Investment Association (IA) said the UK government welcomed its action plan, referenced by chancellor of the Exchequer George Osborne in the 2016 Budget last week.
It will formally update the chancellor on progress on the first and third anniversaries of the plan’s publication.
The action plan, which aims to “catalyse the provision of long-term finance and enhance investor stewardship”, is built on an analysis of the barriers to long-term investment and the role investors can play in lowering these.
Andrew Ninian, director of corporate governance at the Investment Association, said improving productivity required long-term investment by UK businesses.
“The action plan seeks to deliver ambitious and achievable remedies to the ills of some of the most serious causes of short-term thinking in the British economy,” he said.
“The investment industry remains steadfast in its commitment to play its part in fixing the UK productivity puzzle and help fix the challenge of our generation.”
The plan has five principal objectives, underpinned by 12 recommendations in turn based on proposals for “a series of tangible actions”.
It calls on various actors to take action, from companies and investment consultants to asset owners.
Listed companies, for example, should stop reporting quarterly and instead focus on “a broader range of strategic issues”.
Asset managers, meanwhile, should be supported in their public reporting of stewardship activities.
The IA also called for changes to the way in which the relationship between asset owners and investment managers is governed so that it does not “inadvertently embed a short-term focus”.
It has, therefore, proposed to work with The Pensions Regulator (TPR), the Pensions and Lifetime Savings Association (PLSA) and investment consultants “to develop best-practice guidance on how stewardship and long-term incentives can be better incorporated into the Statement of Investment Principles and Mandate design”.
Investment consultants should publicly set out how their activities “support the provision of long-term investment approaches and stewardship in mandate design and performance evaluation”, added the IA.
Having found that defined contribution (DC) pension schemes face barriers to making long-term investments, the IA also proposed establishing a working group “to consider the key regulatory and market barriers to creating a DC investment environment more suited to long-term investment”.
One of the reasons why longer-term financing is not reaching the UK economy, according to the IA, is that solvency and prudential regulation are leading to excessive de-risking in asset allocation.
However well-meaning prudential regulation is, it contains an “over-emphasis on short-term market risk”, said the IA.
This “embed[s] a focus on volatility and benchmark tracking error in the governance of investment strategies deployed”.
This diagnosis is behind further actions proposed by the IA, one of which is to convene a working group “to review the extent to which current accounting standards and solvency and prudential regulatory requirements may be resulting in excessive de-risking by insurers and pension funds and impeding the provision of longer terms of finance”.
Longer-term forms of capital, according to the IA, include equity, infrastructure and private placements.
TPR balancing act
The IA’s action plan contains “a number of interesting recommendations which we will consider further”, a spokesperson at The Pensions Regulator told IPE.
“We already support economic growth by encouraging a balanced approach to the funding of defined benefit pension schemes – benefiting businesses and strengthening security for pensions,” added the spokesperson.
“Employers’ ability to invest in long-term sustainable growth is balanced with our objectives to protect members’ accrued benefits and the Pension Protection Fund (PPF).”
On the topic of DC pension schemes, the spokesperson referred to the regulator’s new code of practice and supporting guides, “which will set out our expectations of trustees in governing their scheme’s investments, and provide helpful guidance to assist them in meeting the challenges in this area.
The code is expected to be laid in Parliament in May, and comes into force in July, according to TPR.
The PLSA, meanwhile, “looks forward” to contributing its members’ perspective to the IA’s programme, said Luke Hildyard, policy lead on stewardship and corporate governance at the PLSA.
“All investors need to take a long-term perspective when undertaking their investments and the Association has consistently promoted responsible, long-term investment stewardship,” he told IPE.
He referred to work already carried out by the PLSA in this area, such as a recent report highlighting the importance of better corporate reporting of human capital and its stewardship disclosure frameworks for asset managers to set out their approach to prospective pension fund clients.
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