Mercer Releases Stewardship Service in Europe

(November 3, 2011) — Mercer has launched a new service to help institutional investors in meeting the requirements of the United Kingdom’s Stewardship Code.

“There is a growing view among academics and investment professionals that environmental, social and governance (ESG) issues does affect the short and long-term performance of institutional investment portfolios,” Will Oulton, Mercer’s Head of Responsible Investment for Europe, said in a statement. “It is the duty of trustees to act in the best long-term interests of their beneficiaries and we believe that effective stewardship can be an important element in both protecting and enhancing long-term shareholder value.”

David Paterson, Head of Corporate Governance at the National Association of Pension Funds (NAPF), said: “The NAPF is a strong supporter of the Stewardship Code and therefore welcomes this initiative from Mercer. By committing to the code and holding their managers to account for their stewardship, pension funds can help raise standards of governance in the investment industry as well as at the companies in their investment portfolios. To do this effectively they need tools such as the new service from Mercer.”

According to Mercer, while the UK Stewardship Code applies in the first instance to investment managers, the Financial Reporting Council (FRC) has stated that all institutional investors, including asset owners, must engage actively in the process, encouraging them to report if and how they have applied the code. Mercer is a signatory to the code.

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Last year, Andy Banks, head of corporate governance at Legal & General Investment Management (LGIM), said the UK’s Stewardship Code has given shareholders the essential ability to consult with each other when issues arise at companies in which they invest. Banks stated in a release: “We do feel there is a receptive environment for more collective engagement. Investors are keen to do it and engage together. Companies should expect to be meeting groups of investors in the future.”

LGIM added that while relations between institutional investors and company management has faced difficulties in the past, the financial crisis has helped spur a new environment for corporate governance, stressing the role of non-executive directors in challenging management decisions. Banks urged companies to be more proactive in scrutinizing succession planning to maintain long-term value for shareholders.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

An increasing number of schemes in the UK have closed to future Defined Benefit (DB) accrual or are currently in the process of doing so, a study by consulting firm Aon Hewitt reveals.

(November 3, 2011) — A study by consulting firm Aon Hewitt has confirmed a continued trend of closure to defined-benefit (DB) accrual among UK schemes.

Just over 300 of Aon Hewitt’s clients with DB arrangements, predominantly in the private sector and across a broad range of industries, were surveyed in the firm’s Pension Benefit Design report.

“Just over 40% of the schemes surveyed have either already closed to DB accrual or are currently in the process of closing to future accrual,” James Patten, benefits design specialist at Aon Hewitt, said in a statement. “Nearly half of those that have closed to accrual, and indeed many of those that have not, are now taking pension risk management to the next phase. In some cases, this might simply be through implementing a liability management exercise such as an enhanced transfer value offer.”

Patten continued: “However, in an increasingly uncertain economic environment, we are seeing more schemes trying to take this concept a stage further. A growing minority is considering, or indeed implementing, ‘flight plan’ strategies to chart a course for reducing pension risk exposure at appropriate times, and/or ultimately fully settling their liabilities with an insurance company.”

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Furthermore, the survey demonstrated growing evidence of some variation by industry. DB closures proved to be most common in technology/IT, telecommunications, professional services and construction.

Patten concluded: “In view of recent market volatility, and further pension cost pressures from auto-enrolment, it will be interesting to see whether organisations in sectors which have so far seen fewer DB closures, such as chemicals and pharmaceuticals, energy and oil, or transport and haulage, will look to follow suit in the years to come.”

The closure to DB accrual represents a greater focus on risk managements strategies among schemes. Mark Hyde Harrison, the new Chairman of the National Association of Pension Funds (NAPF), noted last month that defined contribution (DC) pensions in the UK are inefficient and wasteful. In the UK, DC pensions have largely replaced final salary, or defined-benefit (DB), pensions in the private sector. According to the NAPF, their importance is set to balloon ahead of new government rules that will force all workers to automatically enroll into the system.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742