15 April 2011
FairPensions has produced an excellent, in-depth report which lifts the lid on the conflicts of interest at the heart of pensions management and calls on institutional investors to shape up their act by adopting what it calls an “enlightened fiduciary” model.
Under the FairPensions proposals, launched at an event attended by government minister Ed Davey last month, investors would be forced to prioritize the interests of their end users (savers, beneficiaries etc), whose interests they are supposed to represent, rather than just paying lip-service to them.
FairPensions, which campaigns for transparency and accountability in finance, and was founded in 2005, hopes to “nudge” investors into adopting a more sustainable, longer-term approach to investment and to abandon what it calls their current “self-serving interpretations of fiduciary duty” – under which they can prioritize profit maximisation, and arguably lining their own pockets, to the exclusion of other factors, including financial system stability.
FairPensions chief executive Catherine Howarth, said: “Despite the hard work of many pension trustees, there is no denying the disappointing returns of the last decade. The 2008 financial crisis was a particularly nasty shock. Our report challenges the view that what happened was just bad luck. Rather, the detailed research behind this report suggests we urgently need to shake-up what is expected of the layers of agents involved in investing other people’s pension savings.”
The 135-page report, Protecting Our Best Interests: Rediscovering Fiduciary Obligation, does a demolition job on the current system for pensions management, which the lobby group suggests is designed with the purpose of enriching a long chain of financial intermediaries – including investment consultants, actuarial consultants, asset managers, stockbrokers, investment bankers etc – at the expense of ultimate beneficiaries of pension schemes.
Christine Berry, the report’s author, said: “From 2000-09, pension investment returns collapsed to 1.1% per year while funds’ payments to intermediaries rose by more than 50%. Against this backdrop the industry needs to ask itself whether it is truly fulfilling its fiduciary obligations to beneficiaries. The current situation simply does not offer enough protection for savers from self-serving or reckless behaviour by their agents.”
I covered some of these issues in two earlier blog posts, ‘Having recognized role in crisis, fund managers put themselves on the couch‘ and ‘The UK government is wrong; investors cannot be relied upon to police corporate behaviour‘.
FairPensions is calling on the UK government to launch a formal inquiry into whether institutional investors are adhering to their fiduciary duties.
Under the current model, one must remember that despite all the post hoc rationalisations and mud-slinging, institutional investors played a significant role in stoking up the global financial crisis . For example on August 10, 2007, several weeks after the credit crisis had burst onto the scene, 94.5% of investors in RBS voted in favour of the bank’s disastrous €71bn acquisition of ABN Amro. Fair Pensions is right to point out that the role of the asset management industry and of negligent institutional investors blind pursuit of short term returns has not yet been fully explored.
The report, sponsored by the Nuffield Foundation, concludes by saying: “There is an urgent need to strip away the myths and rediscover what fiduciary obligation is all about … Our overarching conclusion is that the government must conduct a review of investors’ fiduciary obligations. Its goal should be to ensure the legal framework is serving its purpose: to protect us all from irresponsible, short-sighted or self-serving behaviour bu those on whom we depend to act on our behalf.”
The report also calls on government and regulators to ensure that asset managers, investment consultants and insurance companies providing pension products are all “fiduciaries” by law. In a recent article in Investment & Pensions Europe, Berry wrote: “There’s also a need to go beyond the fiduciary label and ask how fiduciary standards can be achieved in practice. At its heart, fiduciary duty exists to tackle the all too human temptation facing those entrusted to act on another’s behalf: to put one’s interest ahead of one’s duty. From this stems the core fiduciary duty of undivided loyalty – which entails a duty to avoid conflicts of interest. Yet, paradoxically, fiduciary duty has not been a prominent feature of debates about conflicts of interest – and, conversely, conflicts of interest do not seem to feature much in debates about the nature of fiduciary duty.”
Richard Murphy, founder of the Tax Justice Network and director of Tax Research UK, has welcomed the report. He said: “It’s been very obvious for a long time that there was an inherent conflict at the core of pension management. Full marks to FairPensions for very ably exposing it.”
A version of this article was published in Qfinance on April 14th, 2011