The UK’s industry-led Investment Governance Group (IGG) recently published a best practice guidance for defined contribution (DC) pensions, which include six principles for DC schemes designed to encourage better investment governance and decision making by all stakeholders, including trustees, employers, advisers, providers, and members.
As I glance at this guidance it makes me realize how little I know about how my own plan is run and where opportunities for input are for plan participants. I contacted the administrator years ago, asking about how the funds vote their stocks and if the program has any requirements in that regard. The answer came back that they must be voted in the interest of fund holders (which, in practice, generally means in the interest of fund and corporate management).
I just got a statement the other day and was looking at how poorly my international investments have been doing this year. I concluded it is probably because the only options they offer are heavily invested in Europe and Japan, instead of emerging markets like China, India, Brazil and Indonesia.
How does your fund operate? The UK best practices guidance could be used as a framework for questions to understand how your program operates and what input you/we, as those who have invested our hard earned dollars, have in the system.
Ten years ago, James P. Hawley and Andrew T. Williams wrote extensively about “universal ownership” and the likely shift in norms (see The Rise of Fiduciary Capitalism: How Institutional Investors Can Make Corporate America More Democratic).
Since universal owners internalize positive and negative externalities of the firms in their portfolios and since they bear the consequences of firms’ norm based liabilities, their fiduciary duty requires universal monitoring of their portfolio. It is in their long-term interest and the interest (by definition) of their investors and beneficiaries to maximize the positive externalities of their holdings and minimize the negative externalities. This may create direct costs (e.g. pollution abatement, product and process redesign) for some firms and sectors of the economy, but will generate gains to other sectors and firms. However, as a general proposition, negative externalities impose costs on affected firms that outweigh – sometimes greatly outweigh – the benefit to polluting firms. Thus it is in the long-term interest of a universal owner, one that owns all firms, to pursue externality monitoring in an attempt to reduce negative externalities and to encourage positive externalities among portfolio firms. This should be combined with portfolio wide norm shift linked risk monitoring resulting in universal portfolio analysis and universal monitoring. (Norm Shifts, Center for the Study of Fiduciary Capitalism)
During the last ten years there’s been a shift away from defined contribution plans, where trusteeship is often held jointly with union or other employee based or elected representatives, toward DC plans where such influence is often less direct. While union and employee representatives seem to give a lot of thought to issues like the need to minimize negative externalities, many management dominated DC plans do not appear to do so. Movement in the direction of a more equitable and environmentally sustainable economy isn’t likely to come about on its own. Change depends on informed public participation, political will, and acquiring the democratic tools necessary so that those who invest our funds on our behalf are more fully accountable to us.
I’d love to hear from readers about their DC plans. If it is mostly invested in stock of the company you work for you, do they pass voting rights along to you? If your plan is like mine, with several fund alternatives, how are those funds chosen? What input opportunities are provided to you on that decision or others? Please let me know.