PLSA Adds Sustainability Section to Pension Governance, Voting Guidelines

UK pension group the Pensions and Lifetime Savings Association (PLSA) on Thursday updated its 2018 Corporate Governance Policy and Voting Guidelines, and urged pension funds to exercise their investor rights on climate change-related risks.

Referencing its 2017 work, where the PLSA produced guidelines on climate change and its economic impacts for pensions funds, the coalition’s voting guidelines has now added a section on sustainability. The new guidelines recommend shareholders not support re-election of board chairs should they fail to provide a detailed risk assessment and response to the effects of climate change on their businesses.

“Companies in sectors affected by climate change and efforts to mitigate it should undertake rigorous examinations of whether their business model is compatible with commitments to mitigate global temperature increases and how they plan to address the issue of climate change. This also requires climate-related expertise at board level,” a subsection of the document reads. “Where, after attempts by shareholders to engage on this issue, companies fail to provide a detailed risk assessment and response to the effect of climate change on their business, and incorporate appropriate expertise on the board, shareholders should not support the re-election of the Chair.”

According to the document, the updated guidelines, “aim to assist investors and their proxy voting agents in their interpretation of the provisions of the Code and in forming judgements on the resolutions presented to shareholders at a company’s AGM.” The PLSA suggests that while its focus relies on what voting sanctions will apply to each company meeting, a vote against management should only be decided and enacted after the company in question’s explanation for non-compliance has been properly considered in light of the particular circumstances surrounding the issue.

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In December, the Financial Reporting Council (FRC) proposed the PLSA make changes to its corporate governance code. The new code proposed changes that included the introduction of five new principles: leadership and purpose; division of responsibilities; competition, success and evaluation; audit, risk and internal control; and remuneration. According to the document, the code will also introduce new vehicles for stakeholder voice in corporate governance structures via the use of worker directors, non-executive directors with designated responsibility for stakeholder relations, or stakeholder committees.

However, the new code has yet to be finalized, and the FRC’s proposal is still subject to consultation. Therefore, the PLSA’s guidelines adhere to the governance code’s current incarnation.

Tags: Governance, Pension, Pensions and Lifetime Savings Association, UK, Voting Guidelines

Public pension systems saw a year of positive returns, adopting more conservative investment assumptions as well as budgeting their spending, an annual National Conference on Public Employee Retirement Systems (NCPERS) report shows.

Pulling responses from 164 state and local government pension funds (62% local government pension funds and 38% state pension funds) with a total of $1.8 trillion in assets, the 2017 NCPERS Public Retirement Systems Study found aggregate one-year returns rose to 7.8%, way up from 2016’s 1.5%, with longer-range returns near the assumed rate of return.

Funds that received their full statutory contributions from governments rose to 74% in 2017, up 4% from the previous year. Employer contributions also rose 4% to reach 22%, a figure NCPERS Executive Director and Chief Counsel Hank H. Kim called “encouraging,” noting that governments honoring pension commitments is what helps drive employer contributions up.

Public pensions also curbed their expenses at an average ratio of 55 basis points per dollar of investment—a lower cost than most mutual funds. According to the 2017 Investment Company Fact Book, equity mutual funds experience an average of 63 basis points per dollar while hybrid mutual funds round out to about 74 basis points.

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Across all pension funds, expense ratios hardly changed, as a subgroup that participated in both 2016 and 2017 studies saw expenses shrink to 52% from 54% .

64% of all participants in the study, have either reduced their return-on-investment assumptions or plan to do so. While the average investment assumption rate remained at 7.5%, the average inflation assumption dropped slightly to 2.9% from 2016’s 3%.

In addition, the trend of shrinking asset smoothing periods for investment return calculations continued, trickling down from 5.7 years to five years.

For the first time in four years, average funding levels dropped slightly as investment and inflation assumptions tipped them down to 71.4% from 74.7% in 2016.

“The nation’s pension systems are deeply committed to their mission of providing a secure retirement for millions of firefighters, police officers, teachers, and other public-sector workers,” Kim said in a statement. “Over the seven years we have conducted this annual study, pension systems have grown increasingly confident in their ability to adapt to pressure and deliver on their promise to retired public servants.”

Tags: 2017 NCPERS Public Retirement Systems Study, NCPERS, Pension, Research