I have always maintained a strong passion for governance. This has been heavily influenced by my work in the pensions industry for over 25 years, including over five years as a trustee for Defined Benefit and Defined Contribution pension schemes. I believe that good governance is crucial because the pensions industry acts as the stewards of capital on behalf of its pension scheme members.
In the UK, we were previously known as KAS BANK, which had a deep history of providing custody and securities solutions to pensions funds. In combination with the company’s UK pension focus, it developed a wealth of experience in the Dutch pension fund market, which is widely regarded as one of the most sophisticated in the world and is well-known for its rigorous governance processes, particularly in terms of regulatory reporting and cost transparency.
In 2019, KAS BANK became part of CACEIS. Today, we deliver end-to-end securities solutions to UK pension schemes.
The combination of KAS BANK’s specialist heritage and CACEIS’s technical expertise has enabled us to create a pensions centre of excellence, staffed by professionals who really understand the pensions market. And the services we provide are now backed by one of the largest financial services companies in the world, Crédit Agricole, which brings us significant balance sheet strength.
What does good governance mean?
Currently, everyone seems to be talking about good governance, but what does it actually mean in practice? We believe that part of it is about providing timely, accurate data that’s flexible enough to adapt to a pension scheme’s changing needs and provides trustees with the tools to help in decision-making. This involves bringing new, often difficult to create, solutions to the market such as cost transparency.
We’ve been working with pension schemes on cost collection and reporting for over eight years. It’s not easy. The data we receive from investment managers can sometimes be unstructured and there are often big data gaps. Consequently, we’ve had to be highly flexible in the way we collect the data and rigorous in how we cleanse it, so that we can turn it into something that’s easy for a trustee board to view and digest. Getting to this point has required a singular focus on governance and looking at what needs to be delivered through the lens of a pension trustee.
We also believe that good governance involves responsible investing. This is a huge topic that involves numerous touch points and it’s not always easy to apply. It can be very difficult, for example, to assess the Environmental, Social & Governance characteristics of a company – and sometimes analysts may disagree on their findings.
Not all custodians provide these value-add services. This is because the barriers to entry are high due to the complexity involved. Moreover, even general services can sometimes be sub-optimal. Indeed, basic functions such as fund accounting can often be quite poor. Pension funds recognise these shortcomings and know that things needs to be improved. At CACEIS, we are doing our part to raise the bar, so that trustees can have greater confidence in the data. It’s all about bringing added value to the service. Harnessing the power of new technology can help here.
Governance is also a regulatory priority
Since the beginning of October 2019, new regulations in the UK now require that pension funds explain their ESG policies in their Statement of Investment Principles. This has been interpreted in several different ways. Many have used standard wording supplied by their consultants. But we suspect that the Pensions Regulator would have preferred them to take their own view. Next year, pension schemes will also have to report on the chair’s statement.
Many trustees articulate their ESG policy through their asset managers. Typically, a trustee will simply ask their asset manager if they’ve implemented their policy. Others merely adhere to the Stewardship code and its principles. Their asset managers will tell them this is fine, but again we believe the regulator would have preferred something more bespoke. Screening according to industry standards might be useful, for example, or independent ratings on asset managers. Again, custodians can support pension funds with this.
We can also use an independent third-party agent to collect data, including ‘look through’ services for funds, and then provide a high-level report for the trustees. We think this is where trustees should be moving. It might be subjective, but at least it’s an independent report, highlighting positive, negative and neutral areas. In our view, this represents a positive step forward.
Trustees also need to have conversations with the managers they employ and the stocks they own. Why does one manager own BP and the other refuses to hold it, for example. Indeed, the trustees of some of the smaller pension funds in the UK don’t necessarily know what funds they hold.
We believe that custodians are ‘the honest broker’ in all this. We can supply independent rigour, consistency and oversight to the process, becoming a trusted partner from a governance perspective. All other suppliers have something to gain. Take cost transparency as an example - we’ve discovered that transaction fees can make up to 25% of a pension scheme’s total investment costs and these investment costs can be three times higher than estimates. From our perspective, highlighting these issues to our pension scheme clients is another example of good governance. And, as a pension fund trustee myself, I know how important this is and how much time and effort goes into the reporting side of things.
Putting something back
It’s also important that custodians engage with the wider pension industry. In 2019, for example, we entered into an educational partnership with the Pension and Lifetime Savings Association (PLSA) and we have just extended this into 2020. The PLSA represents pension schemes across the UK. Its ultimate goal is to achieve better income for pensioners in retirement – and who could argue with that?
For those with long memories, the Robert Maxwell scandal in November 1991 brought home the importance of good governance for pension funds after it subsequently emerged that Maxwell had ‘borrowed’ £460 million from the Mirror group pension fund.
More recently, the situation with Neil Woodford highlighted the challenges with liquidity risk through exposure to unquoted, illiquid securities.
These two examples illustrate the importance of good governance. The Maxwell scandal, in particular, precipitated the movement of assets away from asset managers to the custodians. In the example of Neil Woodford, uppermost in many investors’ eyes was fund governance and the number of illiquid investments held. We believe this wouldn’t have happened in other jurisdictions, such as the Dutch pensions market, where ‘look through’ reporting is used. More generally, we think all pension funds need to be much closer to their asset managers and monitor their underlying funds.
At CACEIS, we apply good governance procedures for all the assets we hold. And we apply the same rigour for the agencies we use for safekeeping, administration and data. This is all part and parcel of what we do. In short, custody is all about good governance and, in a way, I like to think that custodians are helping to police the industry.