Report outlines recommendations to improve pension fund/investment manager relationship

New recommendations to strengthen the relationship between pension funds and investment managers have been set out in a report by a steering group established by the Investment Association (IA) and Pensions and Lifetime Savings Association (PLSA).

The report outlined several recommendations for each stage of the relationship between investment managers and asset owners, from the appointment process through to the ongoing monitoring of established relationships, to help deliver better returns for savers.

It also sought to tackle issues such as a lack of clarity on stewardship expectations, an over-emphasis on short-term performance and not taking sufficient account of the stewardship outcomes that risk undermining longer-term sustainable growth.

The report, Investment relationships for sustainable value creation: Alignment between asset owners and the investment managers, called for greater clarity and articulation of stewardship expectations during the manager appointment process and for investment consultants to be clearer on how they support the incorporation of stewardship.

It also recommended that a ‘governing charter’ setting out mutual expectations on the promotion of long-term sustainable value should be established.

The group said this charter should cover mutual expectations on the promotion of sustainable value through performance reviews, ongoing dialogue, responsibilities to the market and management of systemic risks, culture and governance, and ongoing alignment of stewardship policies.

It also called for the agreement of an oversight framework between assets owners and investment managers that aligns the performance review cycle, the investment and stewardship objectives, and the key performance indicators.

PTL managing director and co-chair of the steering group, Richard Butcher, commented: “Stewardship is essential to building long-term value. Pension trustees and other long-term investors will not succeed in their ESG, climate and sustainability objectives unless they get stewardship right.

“And they cannot be passive about this. The market has different objectives to long-term investors - not least in its time horizon. Despite this, getting good stewardship to work consistently throughout the investment chain is really difficult.

“The recommendations we have set out in our paper are designed to make the process easier and more robust - but their success depends on all parts of the investment chain leaning in. Together they and we can build more sustainable investment relationships to the benefit of savers across the country.”

PTL independent investment management expert and co-chair of the steering group, Archie Struthers, added: “Both asset owners and investment managers are facing unprecedented challenges in supporting the economy to transition to net zero. True collaboration, with a clear focus on sustainable value will be essential to navigate these challenges going forward.

Also commenting on the report, Tumelo CEO, Georgia Stewart, said: “This is good progress, but we can’t stop here. The next piece of the jigsaw to put in place is to strengthen the engagement between trustees and the members whose retirement savings they look after.

"Member engagement should be like an ongoing conversation. It should be a to-and-fro flow of information. This is essential for trustees to accurately represent members’ preferences to asset managers.

“The technology exists now for trustees and pension scheme administrators to share with their members, news and information about voting issues on the companies owned by their pension scheme. The same technology can also capture member preferences on how the asset managers should be voting on their behalf.

“This is the next step in building a pension and investment ecosystem that genuinely works for ordinary people.

“These recommendations help to focus on the practical steps which can be taken at each stage of the relationship from pre-appointment to ongoing oversight. Our goal with this report is to affect an intervention, as the end-to-end investment process can be much improved by all parties leaning in to work more effectively with each other on an ongoing basis, to the benefit of our collective beneficiaries.”

The report followed the Asset Management Taskforce tasking the IA and the PLSA to bring together the pensions and investments industries towards a common goal – to embed stewardship in the relationship between asset owners and investment managers.

The IA and PLSA set up the joint steering group in 2021, which focused on finding solutions for how the relationship between asset owners and investment managers could be governed in a way that promotes a long-term focus and aligns stewardship expectations.

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