The National Association of Pension Funds yesterday announced plans to radically expand its voting advice service on boardroom pay and corporate governance in response to the growing shareholder rebellion over executive greed.
The move is bound further to swell the rising tide of shareholder activism at British companies.
The NAPF, which represents £600bn of institutional investment, is setting up a new company - called RREV - that will give corporate governance analysis and voting recommendations on the FTSE All Share index, rather than just the top 350 companies it currently covers.
Christine Farnish, chief executive of the NAPF, said: "There has been a noticeable and welcome upswing in shareholder activism in recent months. Events have demonstrated the importance of active investor voting.
"Today's announcement highlights the NAPF's determination to build on to its position at the cutting edge of corporate governance debate, and to deliver enhanced governance services both to shareholders and to the companies in which they invest. This should make it easier to be an active shareholder." She said she expected a "lively demand" for the new service.
The new company is a joint venture with the US-based shareholder lobbyist company, Institutional Shareholder Services. It provides proxy research, voting recommendations and governance advisory services to 750 institutions. It also gives recommendations for more than 10,000 US and 12,000 non-US shareholder meetings a year.
This means that UK companies will now face new pressure from American investors who will be given advice in line with the NAPF corporate governance guidelines. This marks a huge potential change in shareholder behaviour, as the UK is the second largest place of investment choice for US investors after Canada. They are reckoned to own around 30 per cent of UK stocks, making them a very powerful group of shareholders now in the NAPF's hands.
There has been a divergence between corporate governance standards in the US and the UK, highlighted by the recent case at GlaxoSmithKline. The NAPF had recommended that its members abstain from supporting the remuneration policy at Glaxo that would have given its chief executive, Jean Paul Garnier, a £22m pay-off. This pay packet raised few eyebrows in the US, where multimillion-pound salaries are the norm. ISS did not register a concern on the Glaxo remuneration policy.
All ISS customers, however, will now receive recommendations on UK stocks based on UK corporate governance guidelines. The ISS and the NAPF are working together to design and harmonise a set of principles to recommendations and research on companies outside the UK.
UK pension funds hold a quarter of their assets in overseas equities, compared with only 10 per cent in 1981. The new RREV service will cover 22,000 companies in 80 countries. Shareholders will also be given the ability to vote on corporate governance resolutions electronically on a newly dedicated website. The NAPF voting service, set up 10 years ago, has had FTSE chief executive and remuneration committees running scared as the organisation has become increasingly vocal in its dispute with companies.
It has raised a number of issues on executive pay with companies including Next, Reuters, Gallaher, Schroders and Shell. Excessive bonuses and two-year contracts that gave the like of Bob Mendelsohn, the former chief executive of Royal & Sun Alliance, a £2.4m pay-off for leaving the company on the brink of financial ruin have come under fire.
So forceful was the NAPF voting service in the case of Standard Chartered that the bank agreed to review its whole remuneration policy to eradicate the NAPF's concerns before its AGM. The NAPF had objected to pay proposals that gave change of control pay-offs to directors as well as bonuses with unspecified performance targets.
The new company will go live in January 2004 and will be provided to subscribers of the NAPF's voting service at no extra cost.
Only one-fifth of final salary schemes open to new members
Fewer than one in five employers now has a final salary pension scheme open to their new staff, research from the National Association of Pension Funds revealed yesterday.
The rate of final salary scheme closures is increasing rapidly with more than 40 per cent of companies closing their schemes in the past 12 months. Some of the most recent closures include GlaxoSmithKline, Barclays, HBOS, Marks & Spencer and Tesco. This compares with 19 per cent in 2002 and 10 per cent in 2001.
The NAPF spoke to the finance directors of 250 UK companies who revealed that a third plan to review their final salary schemes in the coming year. These reviews however are likely to face strengthening opposition from trade unions. Brendan Barber warned, at the NAPF conference in Glasgow yesterday, that there were more pension disputes ahead saying that trade union militancy could be expected in defence of staff pension rights.
The survey found one in four companies had increased their employer contributions to maintain funding levels. BAE Systems has spent the past year wrangling with employees to agree new contribution levels to cover the shortfall in its funds. Staff were asked to raise their contribution levels or join a defined contribution scheme where benefits are not guaranteed. J Sainsbury has also been forced to ask staff for higher contributions or accept lower benefits.
The economic climate was cited by 23 per cent of companies as the main reason for making changes to their schemes. Christine Farnish, the head of the NAPF, said: "Today's market conditions have brought home the true cost of pensions, which were masked during the bull years. Factors giving rise to this cost - often up to 25 per cent of payroll - are well documented." She called on the Government to incentivise employers to retain their pension schemes.
Given the extent of the problem the NAPF said it was disappointed that no one in the Government had not attended its annual conference.
Liabilities outstrip assets by £250bn, actuary warns
The shortfall between the amounts companies have promised to pay their workers in pension benefits and the assets they have to cover them is as much as £250bn, pensions experts warned yesterday.
Ronnie Bowers, of the Institute of Actuaries, said this makes the chances of protecting pension entitlement impossible. Pension schemes are promising £970bn in benefits for their members but schemes only have about £720bn of funds, Mr Bowers said. If they all wound up tomorrow there would be a significant funding gap.
The figures were presented as part of an urgent call on the Government to protect the pensions of workers in companies that go bust or where schemes are wound up with big deficits. The Pensions Advisory Service, the NAPF and the TUC, warned the Government something must be done.
Under the present legislation an employee may have worked for a company for years, contributing to the pension scheme, only to find they have little or no entitlement to their pension benefits if the company folds before they retire.
Workers in the now defunct engineering company UEF protested outside the conference centre in Glasgow, where the NAPF was holding its annual meeting. Some workers were left with only 30 per cent of their pension rights when the company went into receivership. Its pension scheme was in sharp deficit when it folded but pension members who have not yet retired do not form part of the creditors list.
Mr Bowers outlined plans by the Institute of Actuaries to provide employees with more information on the state of their pension fund if their scheme was wound up. The new guidelines would mean actuaries told trustees what benefits might be available if their scheme were to close tomorrow. This would be available on request.
The NAPF and the TUC both want to see pension funds put higher up the list of creditors to a bankrupt company. They also want the creation of a pooled insurance fund that would bail out insolvent schemes.Reuse content