Social Security

1
Regulators

• Social Security?
• As defined contribution PAYG occupational pension
  funds have come to occupy a central place in
  Social Security
• risk transfers from the state employers to
  beneficiaries
• risk caught more and more in hedge funds
  equities

Spectacular crashes in industry pensions have
spurred concerns about the GOVERNANCE of pension
funds Urge pension funds to monitor
governance of COMPANIES and, almost as an
afterthought, SOCIAL ISSUES Market
competition, networks rewards based on
commercial contracts
Mechanism
Environment
2
Pressure for socially responsive investment

• UNITED STATES
• Employee Retirement Income Security Act of 1974
• Interpretive bulletin 29 CFR 2509.94-2 relating
  to written statements of investment policy,
  including proxy voting policy

• INTERNATIONAL
• Principles of Responsible Investment, UN
  Environment Programme Financial Sector Initiative
• Organization for Economic Co-operation and
  Development Guidelines for Pension Fund
  Governance
• Social Dialogue Pension Reform, International
  Labor Organization

• EUROPEAN UNION
• Directive 2003/41/EC of the European Parliament
  on the activities and supervision of institutions
  for occupational retirement provision
• Committee of Wise Men, The Lamfalussy Report,
  The Regulation of European Securities Markets
• Communication, Financial services Building a
  framework for action
• Financial Services Policy 2005-2010

3
Pressure for socially responsive investment

• UNITED KINGDOM
• A review of pensions institutions 2007, HM
  Stationery Office
• Myners principles for institutional investment
  decision-making, Review of progress 2004
  (original review 2001)
• Combined Code on Corporate Governance 2003
• Statutory Instrument No. 1849 The Occupational
  Pension Schemes (Investment and Assignment,
  Forfeiture, Bankruptcy etc.) Amendment
  Regulations 1999
• Response from industry, Institutional
  Shareholders Committee ABI/NAPF/CBI
• Framework on voting disclosure
• The responsibilities of institutional
  shareholders and agentsstatement of principles
• Model statement of investment principles and
  implementation policyresponsible investment

4
Pressure for socially responsive investment

• NETHERLANDS
• Pension fund governance code for Dutch pension
  funds rules for the management, control,
  accountability and supervision of pension funds
• The Dutch corporate governance code 2nd review of
  progress 2006
• Peters report and recommendations, Corporate
  governance in the Netherlands

AUSTRALIA NEW ZEALAND Corporations Act,
Commonwealth of Australia Note, employer
contribution rates RI are mandated in
Australia New Zealand Superannuation and
Retirement Income Act
5
Research question moves to governance
Old Question Not so much the integrity of CSR as
reflected in portfolios Paul Bridgen Traute
Meyer RI no longer screens good companies in,
bad out FTSE4GOOD FTSE, SRI is a defunct
term Current methods Collective pressure groups,
which target institutional networks RI units
inside investors, which target investment
opportunities New Questions System capacity to
provide distribute benefits (BM) Implications
for regulators welfare systems subject to
increasing volatilities Implications for
governors involvement level
6
Rit Rft ?i ßi(Rmt Rft) eit
Social responsibility at large investors

• Asset managers focus on alpha i.e.
  Outperformance
• Formerly, RI units managed ßeta i.e. volatility
• Change of tactics, collective attempt to
  influence Rmt i.e. overall return

Rit is the return on fund i in month t Rft is the
return on a 90 day bank bill in month t Rmt is
the return on the market index in month t e is
the error term
7
Snapshot
8
Implications for governors of pensions
What level of involvement? When regulators,
institutional linkages investment sectors are
lobbied outside
Implications for regulators

• Regulatory attention on influential networks
  rather than reporting e.g. mortgage-backed
  securities owned by SPEs charities escape
  accountability distrust credit squeeze
  rescue buyouts beneficiaries public interest
  not served well
• Hand over to quasi-governmental bodies? E.g.
  United Nations Environmental Programme Finance
  Initiative