The Minister of Employment Relations, Edward Davey, earlier this week told trustees that they needed to "provide proper leadership by asking the questions of the stewardship code" as calls continue for greater engagement from pension funds with the Financial Reporting Council's voluntary corporate governance guidelines.

Speaking at a National Association of Pension Funds (NAPF) seminar, Davey said: "Britain needs long-term investment as our ageing society needs a safe way to fund our growing pension needs."

Warning funds against complacency on the stewardship agenda, Davey told the audience: "It is not enough signing up to the code itself, you have to act on it."

David Paterson, the NAPF's head of corporate governance, admitted that pension funds have a shorter term interest in become signatories to the seven-point code. "The more funds that sign up, the easier it would be to fend off regulation," he said.

The Department of Business, Innovation and Skills has been eager to encourage the adoption of stewardship principals to help the investment industry boost its reputation in the wake of the financial crisis. Amongst a range of other measures, Davey said he would be unveiling new guidelines in July on the reporting of company accounts, saying that the aim is for "boards to benefit from reduced complexity and for trustees and shareholders to benefit from better access to information".

Davey expressed satisfaction that the EU's recent green paper on its corporate governance framework prominently reflects British concerns after some strong lobbying in Brussels. "The paper reflects British interests and offers a good basis for engaging. Good corporate governance across the EU is important for the UK."

Hurdles

Davey said that amongst concerns expressed in government calls for evidence on corporate governance, it was raised that short-term incentives in the fund management industry and the rise of proxy voting in the use of index funds makes shareholders less interested in good stewardship.

Paterson said: "Frankly, amongst all the focus on deficits, stewardship comes quite low down the list of priorities for trustees."

The problem of not giving the agenda enough focus was echoed by Helene Winch, head of policy at BT Pension scheme management, who told the seminar: "We've been pretty busy on other matters such as de-risking and reducing our deficit. Implementing a stewardship policy has been pretty hard work but we've had some successes."

Several experts have questioned how smaller funds can be encouraged to sign up to the Stewardship Code, whose 27 pension fund signatories to date are overwhelmingly large corporate and local government schemes.

Joining forces with other schemes was suggested by Deborah Gilshan, corporate governance counsel of Railpen, who said that its voting and engagement alliance forged last year with the Universities Superannuation Scheme (USS) has proven that "through collaboration we can make our voices louder".

Experiences of engagement with companies tend to show that large asset managers hold more influence than pension funds. Tim Currell of Aon Hewitt said that key challenges for pension fund trustees are therefore being aware of their fund managers' record on stewardship and evaluating how their interests are being carried through by fund managers in engagement and shareholder voting.

29.06.2011

dbillingham@wilmington.co.uk