Promoting transparency for better pension outcomes
The GPTB focuses on the transparency and quality of public disclosures with quality relating to the completeness, clarity, information value and comparability of disclosures.
The overall country benchmark scores were derived from an equal weighting over four factors, 185 questions asked, and 13,875 individual data points analysed. The four factors are governance and organisation, performance, costs and responsible investing.
Five Elements were examined, with 41 questions analysed across the components of: total fund disclosures; asset class/option level disclosure; external management fees disclosure; transaction costs; and member service cost disclosures.
The assessment of governance and organisation disclosures included 35 questions organised across four components: governance structure and mission; board competencies and qualifications; compensation, HR and organisation; and organisational strategy.
Performance scores were based on up to 46 questions across seven criteria: Total fund (or investment option) returns and value added; asset class returns and value added; clarity and quality of return and benchmark disclosures; asset mix and portfolio composition disclosures; explanation of risk management policies and specific risk disclosures; explanation of key results and outlook; member service goals, plans, and service level reporting; funded status disclosure discussion of assumption and risks.
The assessment of responsible investing disclosures included 53 questions across three key components: responsible investing framework and reporting; responsible investing governance; and responsible investing implementation.
Select a factor
Cost scores were based on 41 questions across four components common to all, and eight questions for member services. Member services represented 10 per cent of the total cost factor score but were only applicable for organisations that administer benefits in addition to managing the fund. This weight was redistributed to the other factors for funds that do not administer benefits, thus each individual fund would always receive a score out of 100.
There are barriers to comparability in reviewing costs across the globe. The differences in tax treatment, organisation/plan types, and accounting and regulatory standards means that it is difficult to find common ground for assessment. Thus, the review is not meant to be a comprehensive review of all cost disclosure elements as they vary from region to region and even from fund to fund. Rather, it is focused on the material areas common to most funds.
The average country cost factor score was 51, up slightly from last year’s review score of 48. Individual fund scores ranged from 7 to 93. The lowest-scoring cost component continued to be transaction costs (country average of 26), followed closely by detailed asset-class cost disclosure (country average of 35, up from last year’s average of 32).
As the dispersion in scores suggest, cost disclosures varied considerably in completeness. There was a wide range of quality as well, though qualitative factors were out of scope. Disclosures were better when the pension fund (defined benefit or defined contribution) was a single-purpose entity rather than a silo of a larger organization such as a wealth management company or a government department.
The Netherlands continued to lead the way with the highest country score of 80. The top three cost factor scores were held by The Netherlands, Canada and Australia. The primary distinguishing factor of these leading funds is the strict regulatory environment that they operate in.
Cost questions asked
Overall Results Cost.
“It’s not what you pay a man, but what he costs you that counts.”
One common problem for stakeholders of large funds is incomplete and inconsistent cost transparency. Most costs reported to stakeholders are those that are explicitly paid (e.g., through written cheques or wire transfers) and exclude material costs that are netted from returns or from AUM. This is especially true for external management fees and transaction costs, two of the most material expenses for asset owners.
Generating adequate net investment returns is an absolute requirement for success for all funds. CEM’s asset owner performance database clearly shows that net returns are materially impacted by investment management costs, with approximately 75 per cent of gross returns above benchmarks going to pay related investment costs. Paying more does not necessarily get you more. Cost-effective investment management strategies generally outperform high-cost approaches over the long term. Costs matter. They should be understood, managed, and disclosed.
The assessment of cost disclosures included 50 questions organised across the components below. They focused on the completeness, accessibility, and level of detail provided.
Annual reports and financial statements were the main sources of information used for scoring. Occasionally, funds also provided cost information on their websites. For a few countries, some cost disclosures were sourced from regulatory body websites. These disclosures were reviewed if they were referenced on pension fund websites or in annual reports.
1. Total fund cost disclosures (25% of factor score)
Questions focused on whether total cost and the various components of total cost were disclosed. Points were awarded for describing and discussing cost/expenses in a prominent location, not only in the financial statements. Marks were also awarded for: putting total costs in the proper context (e.g., as a % of assets or compared to prior years’); for clarity on what costs were included and allocated; and, for the completeness of disclosures.
2. Asset-class level disclosures, or investment option for DC plans (15% of factor score)
Asset mix is an important driver of total fund costs. The focus was on completeness and level of disclosure across the various asset classes. Points were awarded if funds disclosed additional context on why their costs might be different. Examples of contextualization include information on asset mix or cost trends.
3. Completeness of external management fee disclosures (30% of cost factor score)
External management fees are typically the largest investment cost, even for funds that manage high proportions of their assets internally. The focus was mainly on external management fee disclosures in annual reports and financial statements. Generally accepted accounting principles for reporting investment costs vary considerably by country. This means that external managed costs are often not fully disclosed in the financial statements themselves. However, points were awarded if these costs were acknowledged, quantified, and reported elsewhere, such as in management discussion and disclosure analysis, key performance indicators, etc. For DC plans, these questions were answered from the context of disclosure of option level costs.
4. Transaction costs (20% of factor score)
Transaction costs are also material, but similar to disclosure of external manager fees, difference in accounting standards results in inconsistent disclosure across funds. Marks were awarded for completeness as well as the level of detail included (e.g., estimating fixed income transaction costs based on spreads, market impact). For DC plans, these questions were answered from the context of disclosure of option-level costs.
5. Member service cost disclosure (10% of factor score, where applicable)
Some organisations managed both the investment function and benefit administration for plan members. For these organisations, member service cost disclosures were scored separately. In contrast to the investment functions, member service “returns” are not as visible, so it is doubly important to provide stakeholders with the information that lets them know that cost monitoring is in place and that incurred costs are reasonable. Cost disclosures were reviewed for completeness, context, and level of detail.
Organisations were scored based on 35 questions across four components. The average country score was 71 out of a possible 100. This represented an increase of seven from last year’s average score of 64. The biggest Canadian public funds continued to be the leaders in governance disclosures, consistent with their reputation of excellent governance. Australia, Sweden, Denmark, the United Kingdom and Finland scores improved significantly as they made changes to improve their governance disclosures.
In last year’s review we noted that governance scores were most closely correlated with the overall score and posited that perhaps it was that case that as good governance produces positive results, it creates greater incentive (or perhaps less disincentive) to be transparent with stakeholders. There is evidence of a relationship between responsible investing and governance scores. Good governance allows funds to move beyond simply managing assets and towards addressing wider environmental and social issues.
The governance factor was assessed by looking at four criteria
1. Governance structure and mission.
Average country score: 85 (last year 77)
Scores for this component far exceeded those of any other three components with more than 75% of funds scoring greater than 80. Only the Mexican funds scoring less than 60 on average. The average score of 85 was an 8 point improvement from last year’s review.
High scores in this area should be expected as many of the items reviewed represent the bare minimum stakeholders should expect. Fortunately we observed almost universal disclosures (73 of 75 funds) of the following basic information:
- An overview of the governance structure;
- Disclosure of the names of the board of directors; and
- Disclosure of all subcommittees subordinate to the main board.
It was heartening to see improvements in some areas from last year’s reviews:
- 83% of funds reviewed now disclosed their mission statement, up from 69% in last year’s review.
- Disclosures of conflict of interest policies and proxy voting policies also improved, in line with improvements in RI disclosures. There is still room for improvement, only 63% of funds disclosed their conflict of interest policies.
Scores in other areas were not as encouraging with basic disclosures far from universal:
- 15% of funds did not disclose how or by whom board members were selected; and
- Despite the almost universal disclosure of sub-committee names, only 85% of funds provided details on each committees’ responsibilities with only 78% listing the membership of each committee.
Many disclosures were commendable but there are some areas that need improvement including:
- While most funds did disclose their governance structure, some disclosures were vague and unclear. These disclosures seemed to assume readers would be familiar with governance norms of the country. This seemed particularly true in countries where fund governance structure is quite tightly regulated.
- Disclosures on the selection/election of board members were often quite vague and rarely talked about timing of past and/or future elections/selections. In addition, committee member start and end dates were often not disclosed, and if they were, start dates were far more common than end dates. In combination, it is hard for stakeholders to gauge how frequently the board turns over and evolves.
- Although more than half of funds disclosed board policies around conflicts of interest, in some instances, the language was confusing and seemed uncommitted. A clearly written conflict of interest policy gives confidence and trust in a well-governed organisation.
Questions relating to governance structure and mission
- Is the overall governance structure for the fund outlined?
- Does the fund have a clear mission statement identified as such?
- Are all sub-committees listed?
- Are the parties responsible and methods for selecting the board member outlined?
- Are all the members of the board of directors named?
- Are the sub committees that each member sits on documented?
- Is the start date of each board member disclosed?
- Is the end of each board member’s term disclosed?
- Are the oversight responsibilities of the board and each sub committee available for view, or at least a detailed summary?
- Is the board’s conflict of interest policy detailed as well as how real or apparent conflicts are dealt with?
- Are the fund’s processes for monitoring portfolio companies, including proxy voting policies disclosed?
2. Board competencies and qualifications.
Average country score: 41 (last year 36)
Disclosure of board competencies and qualifications continued to disappoint, despite an improvement in the average score from 36 to 41. Canada continued to be the only country to score above 80. South Africa joined the United Kingdom and Australia as the only other countries to score above 60 in this area.
Disclosure of board member experience and relevant qualifications continued to be the only area in which most funds reviewed received a positive score. Despite more funds disclosing this information this year (60% vs. 55% in last year’s review), the result is still very disappointing for what should be a basic disclosure.
It was pleasing to see increased disclosure prevalence in some areas, including:
- An increase in the number of funds that disclosed board education policies. Prevalence was still low at 36% of funds globally, but nonetheless a marked improvement from last year when only 21% of funds made such disclosures; and
- 28% of funds saw fit to disclose desired board competencies, up from only 17% of funds last year. Still only 9% of funds saw fit to compare and contrast desired competencies with those actually possessed by current board members, an improvement from a very low 5% of funds in last year’s review.
It goes without saying that there continues to ample room for organisations to improve including the items below which all saw disclosures from less than half the funds reviewed:
- The use of plain language to describe the skills and qualifications of board members and how they are relevant to the oversight of the fund;
- Demonstrating a commitment to having a knowledgeable, well qualified board by disclosing actual versus desired board member competencies, continuing education initiatives and board review processes; and
- Holding board members accountable by disclosing board member attendance at both the full board and for any subcommittees.
Questions relating to board competencies and qualification
- Are board members experience and relevant qualifications listed?
- Are the desired competencies of the board of directors listed?
- Are actual board member competencies contrasted against desired competencies?
- Are changes to the governance process and/or structure (if any) in the prior year discussed?
- Are continuing education policies for board members documented?
- Are board effectiveness reviews discussed?
- Are the number of meetings of the board and each subcommittee documented?
- Is the attendance record of each member of the board recorded?
- Is the attendance record of each member of a sub committee documented?
3. Compensation, HR and organisation.
Average country score: 51 (last year 44)
Compensation, human resource and organisational information disclosure continued to display the highest variability across countries of any component. The overall average score of 51 was an improvement from last year’s score of 44. Four countries had scores of 75 or above. Conversely there were also four countries that scored less than 25 in this area.
Salary disclosure continued to be the biggest factor leading to differences in scores across the countries reviewed, with little change observed year over year:
- In four countries, all five funds disclosed board member compensation, in three others, none of the five funds did; and
- In two countries, all five funds disclosed total compensation for the CEO and their top two reports, in six others, none of the five funds disclosed management salary information.
Disclosures in most areas improved year over year, with a couple of notable improvements:
- Slightly more than half of the funds reviewed now disclosed the processes and/or philosophies used to determine board compensation. We observed such disclosures at 53% of funds reviewed this year, up from 39% of funds last year.
- The focus on diversity is growing globally and two-thirds of all funds made disclosures about employee diversity programs. In all countries, at least one fund reported on their diversity programs. Last year only 51% of funds reviewed disclosed their diversity policies.
Recognising that disclosure of actual remuneration may be a difficult sell in countries where it is not required, there are still several areas where compensation, HR and organisation disclosures could be improved:
- Many disclosures on board compensation philosophy were quite vague. It would be good to see more disclosures around time commitments and peer groups used to determine board compensation.
- Disclosures around management compensation philosophy are more insightful if they provide clear details on how variable compensation is aligned with stakeholder outcomes. Better still if the relevant organisational results are disclosed along with actual management remuneration to demonstrate that compensation philosophy is being followed in practice. Only 13% of funds reviewed provided such disclosures.
Questions relating to compensation, HR and organisation
- Are processes and/or philosophies for determining compensation for management disclosed?
- Are processes and/or philosophies for determining compensation for the board disclosed?
- Is compensation for board members shown?
- Are the names and titles of the CEO and top four direct reports available?
- Is total compensation for the CEO and the two next highest comped management members disclosed individually?
- Is variable compensation for the CEO and the two next highest comped management members disclosed separately?
- Were details provided on how actual management compensation was determined with reference to actual fund results?
- Is the total organisational headcount disclosed?
- Are the fund’s employment diversity policies listed?
- Is the fund’s total headcount disclosed by gender?
4. Organisational strategy.
Average country score: 71 (last year 63)
The items scored under this component were heavily revised from last year. The focus now being on corporate goals and results as well as disclosures of the management of both financial and non-financial risk factors. In last year’s review these items were covered in other sections.
Overall the results were positive with an average score of 71, which represents and increase from a restated score of 63:
- 96% of all funds disclosed investment/ financial risk management governance policies and practices.
- Disclosure of non-investment risks was lower, with 81% of funds doing so. For the most part these disclosures were detailed and fulsome, with many funds dedicating entire sections of annual reports or policy documents on risk management for both investment and non-investment risk.
What funds can do better:
- While more funds are making disclosures of overall corporate strategy, many still focus almost entirely on investment matters. Much like traditional corporations in other industries, asset owners’ corporate strategy extends beyond their core mission. Stakeholders are interested and deserve insight into corporate direction and plans. Examples could include plans to in-source certain functions, development of a new website or member portal, or perhaps human resource initiatives. A review of progress in the prior year is good, disclosure of strategies for the following 3-5 years, even better.
- Measuring corporate achievements against corporate goals in a quantitative way. For the 65% of funds that discussed their goals for their previous year, less than half of those funds measured them quantitatively. Discussions on corporate strategy do not hold as strong a weight if they are not benchmarked and compared against a measurable standard.
Questions relating to organisational strategy
- Are investment/financial risk management governance, policies and practices discussed?
- Are non-investment risk factors and related policies and practices discussed? (e.g. regulatory/legislative, reputational, operations, cyber-security)
- Are the fund’s corporate goals, other than investment matters, discussed for the previous year?
- Are the fund’s corporate goals, other than investment matters, for the following year discussed?
- Are corporate achievements, other than investment matters, contrasted against corporate goals in a quantitative way?
Governance questions asked
Overall Results Governance.
“If you don’t know where you are going, any road will get you there.”
Lewis Carroll in Alice’s Adventures in Wonderland
The assessment of governance and organisation disclosures included 35 total questions organised across the four components outlined below. Some revisions have been made to the questions informed by observations from last year’s review.
Questions around the philosophy and mix of internal/external and active/passive management were moved from the governance and organisation factor to performance. Questions around management governance of both investment and non-investment risks, previously part of the performance factor are now included in governance and organisation. These changes reflect that these items were more often observed alongside other information within the respective factors. Two questions were removed since they were similar to questions from the cost factor and there was not sufficient differentiation in results last year to warrant retaining. Additional questions were added in a couple of areas to allow for additional granularity of scoring where it was observed that several funds likely deserved partial marks based in last year’s scoring.
Annual reports usually contained much of the information, with much of that information mirrored or supplemented on websites. Occasionally, some disclosures were found in other documents such as: codes of ethics; corporate governance/stewardship guidelines; and investment policy statements.
1. Governance structure and mission (40% of governance and organisation factor score)
Effective stewardship of large pools of assets requires a robust governance structure with a clearly articulated mission. While assessing the quality of the governance structures in place is beyond the scope of the project, certain information is required for stakeholders to do any form of appraisal. Is the overall governance framework outlined including all committees and subcommittees responsible for overseeing management? Are the respective responsibilities of these bodies clearly articulated? Are the individuals who serve on these bodies identified along with how long they have served in their roles?
2. Board competencies and qualifications (20% of governance and organisation factor score)
A governance structure is only as effective as the combined skills and experiences of the individuals involved. Desired skills and competencies should be identified and disclosed, as should the actual skills and competencies of current directors and committee members. Governance structures and processes should evolve to meet changing needs. Disclosure of changes to process and structures, board effectiveness reviews, and continuing education endeavors signal an organisation with a governance structure that is dynamic and evolving. Unlike the ongoing nature of management, boards and committees convene only a finite number of times per year. The number of board and committee meetings along with member attendance should be disclosed.
3. Compensation, HR and organisation (25% of governance and organisation factor score)
Effective compensation policies should allow the attraction of skilled individuals and help drive and reward desirable behaviors. The processes and philosophies on how compensation is determined for both the board and senior management should be disclosed. Disclosure of actual compensation for the board, the CEO, and the management team is a demonstration that these processes are being followed. Better still if actual management variable compensation is justified with quantitative comparisons to organisational results. Statements of diversity demonstrate that an organisation is focused on all aspects of employee wellbeing. Total staff headcount and compensation lend insights into the structure of an organisation. Total staff headcount split by gender lends insights into the structure of an organisation and reinforces a commitment to diversity.
4. Organisational strategy (15% of governance and organisation factor score)
Disclosing overall organisational strategy beyond simple investment strategy, both for the past year as well as the future, demonstrates an integrated approach to management and allows stakeholders a more fulsome view. Detailed qualitative disclosures of the processes to manage risks, both investment and non-investment, provides valuable insights on the durability of organisational success.
Performance scores were based on up to 47 questions across seven components that were common to all, and two (member services and funded status) that were only applicable for some organisations. Components were re-weighted to accommodate what was not applicable, so that each individual fund was scored out of 100. The overall average score was 64, up from 62 last year and the second highest scoring factor after governance (71). Average country scores ranged from 32 to 89.
Disclosures were generally comprehensive for the current year and at the total fund or investment option level. In contrast, reporting on longer time periods and asset class results were more often minimal or missing although more funds were observed disclosing intermediate (i.e. three to seven years) performance figures.
The components with the highest scores continued to include asset mix and portfolio composition and risk policy and measures. Similarly the lowest scores were seen for asset class returns and value added and benchmark disclosures.
The Canadian funds now lead the way, with an average country score of 89 for the performance factor. The US funds typically had extensive and good quality reporting across all performance components. All country rankings and scores were as follows.
The performance factor was assessed by looking at the following criteria
1. Total fund or investment option returns and value added.
Average country score: 76 (last year 75)
Scores in this component increased marginally to 76 from last year’s average score of 75. Current year disclosures continued to be almost universal. Scores dropped off for intermediate-term (any of 3 – 7 years) and long-term (10 years or more) disclosures. This year’s review found that 88 per cent of funds disclosed intermediate returns, an increase of 9 per cent from last year. Six countries had average scores over 90, an increase of two from last year.
- 100 per cent of all funds reported one-year total fund or investment option returns
- 86 per cent of all funds reported one-year value added at the total fund or option level, down slightly from 88 per cent last year.
- 86 per cent of all funds reported current performance (e.g., quarterly, monthly) on their websites, a slight increase from the 83 per cent observed last year.
- Only 50 per cent of all funds reported long-term value added
Questions relating to total fund or investment option returns and value added
For defined benefit and insurance plans, questions are answered in respect of the total fund. For defined contribution funds, questions are applied to the largest investment options.
- Are 1-year returns disclosed?
- Are intermediate returns disclosed (any of between 3 and 7-year)?
- Are long-term returns disclosed (10 years or longer)?
- Is 1-year value added and/or policy return/benchmark disclosed?
- Is intermediate value added and/or policy return/benchmark disclosed (any of between 3 and 7-year)?
- Is long-term value added and/or policy return/benchmark disclosed (10 years or longer) ?
- Is there disclosure of ‘current’ (e.g. monthly or quarterly) performance?
2. Asset class returns and value added.
Average country score: 37 (last year 35)
Similar to fund level disclosures, we observed a slight improvement in asset class level disclosures, with the average country score increasing from 35 to 37. We continue to be surprised by the contrast between the generally good total fund/investment option scores and the much lower asset class level scores. Asset mix decisions drive about 97 per cent of total fund or investment option results and asset class performance is fundamental to understanding overall results The US continued to lead the way with an average score of 100 but only three countries had scores of 60 or more. In contrast, seven countries had average scores less than 30, one more than last year. Individual fund scores ranged from 0 to 100.
- One-year asset class return disclosure continued to be the highlight: 76 per cent of all funds reported this, unchanged from last year.
- 37 per cent of funds now report intermediate asset class returns, up from only 31 per cent last year.
- Disclosures of long-term asset class performance and value added continued to be disappointing with only 23 per cent reporting performance and 18 per cent reporting value-added, both slight increases from last year.
Questions relating to asset class and value added
For defined benefit and insurance plans, questions are answered in respect of the total fund. For defined contribution funds, questions are applied to the largest investment options.
- Are 1-year returns disclosed at the asset class level?
- Are intermediate returns disclosed (any of between 3 and 7-year) at the asset class level?
- Are long-term returns disclosed (10 years or longer) at the asset class level?
- Are 1-year value added and/or benchmark returns disclosed at the asset class level?
- Are intermediate value added and/or benchmark returns disclosed (any of between 3 and 7-year) at the asset class level?
- Are long-term value added and/or benchmark returns disclosed (10 years or longer) at the asset class level?
3. Clarity on basis for return and value-added calculations.
Average country score: 63 (last year 64)
To understand and compare total fund and asset class returns and value added it is essential that the basis for return calculations is also understood. Are the returns time-weighted or IRR? Are returns gross or net of investment costs (and all costs or only some costs)? This is not hard to do and some funds do provide concise and clear descriptions where they report returns and value added. Like last year, these disclosures were all too often non-existent, minimal, cryptic, or not provided where returns and value added were reported. The average country score declined slightly to 63 for 64 last year. The US led the way this year with an average score of 88. Switzerland, the top scoring country last year, regressed but was still one of four countries with average scores of 80 or more. The lowest average country score was 34. Individual fund scores ranged from 0 to 100.
- 89 per cent of funds disclosed the cost basis for returns and 83 per cent of all funds reported total fund or option returns net of investment costs, both relatively unchanged from last year.
- In contrast, it was only clear to us that 57 per cent of all funds reported asset class returns net of costs, an improvement from 53% last year.
- Last year, 60 per cent of all funds clearly reported that they were disclosing time-weighted returns (TWRR), which unfortunately dropped to only 53 per cent of funds this year.
Questions relating to clarity on basis for return and value added calculations
For defined benefit and insurance plans, questions are answered in respect of the total fund. For defined contribution funds, questions are applied to the largest investment options.
- Is cost basis of return calculations disclosed?
- Are total fund returns expressed net of investment costs?
- Are asset class returns expressed net of investment costs?
- Is basis for return calculations disclosed (eg. IRR, TWRR)?
- Are return calculations time weighted rates of return?
- Is total fund net value added disclosed?
- Is asset class net value added disclosed?
4. Benchmark disclosures.
Average country score: 40 (last year 44)
Interpreting and comparing of reported value added is challenging because of the diversity of benchmarks or targets utilised across funds. Approaches at the total fund or option level included: real return targets (e.g. CPI + 4 per cent); actuarial-based target returns; competitor returns for similar investment options; and aggregations of asset class passive indices. Positive scores were awarded for value added reporting when any type of benchmark or target return was used at the total fund or option level. But positive scores for value added reporting for public market asset classes were only awarded for what was considered ‘appropriate’ benchmarks. The benchmarks used for private market asset classes were not scored.
US funds again led the way with an average score of 80, but only four countries had average scores of 60 or more.
- This year we scored if funds clearly disclosed how they determine their overall fund level benchmark. Unfortunately, only 16 per cent of funds reviewed did so with clarity.
- More positively, 57 per cent of all funds had clear disclosures of their benchmarks at the asset class or option level and 44 per cent of all funds reported clear and appropriate benchmarks for public market asset classes. That said, both were slight declines from last year’s scores of 60 per cent and 49 per cent respectively.
Questions relating to benchmark disclosures
- Is there clear and specific disclosure of the benchmark composition at the total fund level?
- Is there clear and specific disclosure of the benchmark composition at the asset class or option level?
- Are most public market benchmarks appropriate (investable, generally match asset class)?
5. Asset mix and portfolio composition.
Average country score: 56 (last year 61)
Asset mix and portfolio composition reporting provides important context that helps stakeholders understand portfolio diversification as well as the related returns and risks. These disclosures were generally quite extensive, but the communication quality was wide ranging. Some were uninspiring ‘data dumps’ (e.g. endless lists of portfolio holdings) whereas others provided helpful and insightful summaries and context.
This year’s review included two items that were previously reviewed in the governance factor. These were whether a fund discussed their philosophies around active/passive management and internal/external management. Disclosures of either were rare, with fewer than one in six funds reporting either.
Scores in this component were consistently mediocre. Canada achieved the highest average country score at 76, with Sweden and the US the only other countries to score 70 or above. All but Mexico achieved average country scores above 40.
- All but one fund reported current asset mix, which was one fund less than last year’s review.
- In contrast, only 56 per cent of all funds provided an asset mix trend (three or more years), a slight decline from the 59 per cent of funds that did so last year.
- 71 per cent of all funds provided summaries of at least their largest holdings and many provided all holdings and 66 per cent of all funds provided details of their largest external managers and many provided all holdings, both slight improvements from last year’s review.
Questions relating to asset mix and portfolio composition
- Is the current asset mix disclosed across major asset classes or options?
- Is the fund’s actual mix of active/passive strategies disclosed?
- Is the fund’s rationale/philosophy for active/passive implementation disclosed?
- Is the fund’s actual mix of internal/external strategies disclosed?
- Is the fund’s rationale/philosophy for internal/external implementation disclosed?
- Is there any asset mix trend disclosure?
- Is there portfolio composition disclosure related to:
- Geographic concentration overall or by asset class?
- Holdings: list of largest holdings of individual companies, fixed income securities, unlisted individual investments, or disclosure of all holdings
- List of largest external managers, for some asset classes, or disclosure of all external managers
- Disclosure of other portfolio composition factors: e.g. % listed/unlisted, fixed income categories, derivative types, types of real estate and mortgage holdings, types of private equity, infrastructure. Score of 1 for each factor disclosed to a maximum of 3.
6. Risk management policies and specific risk measures.
Average country score: 77 (last year 82)
This component was revised from last year’s review and now looked only at quantified risk statements. Questions of a qualitative nature, i.e. disclosures of risk practices and risk governance, are now reviewed in the Governance factor.
Disclosures in this area continued to be observed among most of the funds. Six countries had average scores of 90 or more and the lowest score was 37.
- 81 per cent of all funds provided quantified risk measures at the total fund/investment option or asset class level. Examples of such measures are value at risk (VAR), portfolio volatility, expected years with negative returns).
Questions relating to risk management policies and specific risk measures
- Is there disclosure of actual risk levels for the following factors:
- Actual risk level disclosures for total portfolio or options, asset classes and/or risk ‘factors’. Examples of measures include: Value at Risk (VAR), volatility, tracking error, probability of negative return.
- Disclosure of any additional risk factor measures. Examples include:. Counterparty risk, credit quality (ratings), liquidity, foreign exchange, derivatives exposure, portfolio concentration. Disclosures can be the specific exposure, or the policy adhered to in the portfolio . Score of 1 for each factor disclosed to a maximum of 3.
7. Explanation of key results and outlook.
Average country score: 77 (last year 72)
This is a component that provides an opportunity for funds to improve the depth and quality of their disclosures. Discussions of results and the key factors driving them can provide important context for stakeholders. There were some very interesting and insightful discussions. Others were more cryptic and did not provide material additional information. The scoring system provided for an assessment of this ‘quality’ range.
The country average score improved from 72 last year to 77. The Dutch funds continued to lead the way in this area with an average country score of 96. Seven countries had average scores of 80 or more, two more than last year and the lowest score increased to 42, from 22 in last year’s review.
- 96 per cent of all funds discussed the impact of economic and market conditions on total fund or investment option key results over the past year, an increase of 5 per cent over last year’s review.
- The percentage of funds that included a ‘looking ahead’ discussion of economic and market expectations and possible implications increased markedly, from only 61% of funds last year, to 88 per cent of funds this year.
8. Member service goals, plans and service level reporting.
Average country score: 60 (last year 65)
76 per cent of individual funds reviewed had member service operations and 24 per cent did not, with member services typically provided by a different organisation that was not reviewed. Considering that pension funds exist for their members, we continue to be disappointed overall by the levels of disclosures by some funds. In contrast some member service disclosures were excellent. With a score of 100, Canada now has the highest average score, with Australia slipping to third overall. There continued to be a wide dispersion of results: three countries had average scores of 85 or more while five countries had average scores of 50 or less.
- 69 per cent of funds with member service operations discussed member service goals, progress, and plans
- 63 per cent of funds with member service operations provided actual service level performance outcomes for member transactions or experiences (e.g., call answer time)
- 53 per cent of funds with member service operations reported any of customer satisfaction, customer effort or net promoter scores.
- 44 per cent of funds with member service operations discussed service levels with reference to external benchmarks
Questions relating to member service, if applicable
This section is applicable only to organizations who are also charged with administration of member pensions/benefits.
- Are any of: Customer satisfaction, customer effort or net promoter scores disclosed?
- Are any service performance metrics for member transactions or life events disclosed?
- Is member service performance explained with reference to external benchmarks?
- Are member service goals, progress and plans discussed?
9. Funded status and discussion of assumptions and risks.
Average country score: 92 (last year 96)
Funded status and related disclosures were relevant for only 56 per cent of funds studied: those with responsibility for both assets and liabilities for defined benefit plans and ‘insured’ benefit schemes. This is a very complex area plus regulatory regimes and rules are not uniform. Highly technical required reporting was the norm. Some funds did provide excellent reporting that made the material easier to digest and more relevant for non-actuaries. Scores were skewed high: seven countries had an average score of 100 and the lowest average country score was 60.
- All but one fund reported their period-ending funded ratio or solvency position
- At 84 per cent, fewer of these funds disclosed trends in funded ratio or solvency position (3 or more years)
- 84 per cent of these funds discussed key assumptions underlying their funded status or solvency position (e.g., longevity, mortality, return and interest rate assumptions)
Questions relating to funded status and discussion of assumptions and risks
This section is applicable only to defined benefit and insurance organizations.
- Is the funded ratio or solvency position disclosed?
- Is there any disclosure of trends in funded ratio or solvency position?
- Are key assumptions used to determine funded ratio or solvency position disclosed (e.g. mortality table, return assumptions, interest rate)
- Is there discussion of sensitivity of funded ratio/solvency position to assumptions/scenario changes/returns?
Performance questions asked
Overall Results Performance.
“However beautiful the strategy, you should occasionally look at the results.”
Sir Winston Churchill
The assessment of performance disclosures included 47 questions organized across the components outlined below.
Annual reports usually contained much of the information to be analysed. Some funds, and especially DC funds, also had extensive reporting on their websites. Occasionally, some disclosures were found in other documents such as: listings of investment holdings and external managers; investment policy statements; and risk policy statements.
The performance factor was assessed by looking at the following criteria:
1. Total fund (or investment option) and asset class returns and value added (25% of the performance factor score)
Generating adequate investment returns is fundamental to the success of all pension plans. Asset mix is the biggest driver of long-term returns. Most funds also implement active management programs, aiming to add value over passive public market implementation. The review of return and value-added disclosures covered timelines reported for total fund and asset class results: 1-year; intermediate (any of 3 to 7-year); long-term (10 years or more); and current (e.g. monthly, quarterly).
2. Clarity and quality of return and benchmark disclosures (17% of the performance factor score)
Evaluating returns and value added is difficult unless you understand the basis for the calculations and the composition of the benchmarks used. Important considerations include: Are returns gross or net of investment costs? Are asset class benchmarks appropriate and comparable?
3. Asset mix and portfolio composition disclosures (15% of the performance factor score)
Investment performance is driven by asset class exposures, implementation, and holdings of specific investments. Disclosures related to these portfolio factors enhance understanding of performance. Disclosures focused on included: current asset mix and trend; exposures and concentration by market, geography, holding, and manager; and implementation details within asset classes.
4. Explanation of risk management policies and specific risk disclosures (5% of the performance factor score)
Investment rewards and risk go hand in hand. Risk is unavoidable. But sound risk management policies and practices help organisations prepare for and manage adverse events. The disclosures of actual risk levels were evaluated (eg value at risk, liquidity, credit quality, foreign exchange exposure).
5. Explanation of key results and outlook (9% of the performance factor score)
Commentary on the economic and market conditions experienced adds color and depth to the understanding of results achieved. The analysis also looked for a ‘looking ahead’ discussion of economic and market conditions and possible implications.
6. Member service goals, plans and service level reporting (20% of the performance factor score when applicable)
The investment function was included within the mandate of all pension funds reviewed, but for some, the member service function was the responsibility of another organisation that was not reviewed. Where member service was part of the mandate, analysis was on disclosures relating to: goals, plans and progress; actual service levels achieved (eg call answer times, website features and service transaction volumes) and reporting of customer satisfaction, customer effort and net promoter scores.
7. Funded status disclosure discussion of assumptions and risks (9% of the performance factor score when applicable)
Some of the funds reviewed managed defined benefit assets and had responsibility for both sides of the pension balance sheet – assets and liabilities. For these funds we assessed disclosures related to funded status including disclosure and discussion of key assumptions and risks.
Funds were scored based on 53 questions across three major components. The average country score was 59 out of 100, up from 49 in last year’s review, once again marking the biggest relative improvement among any of the four factors. Improvements to disclosures were evident across all components and most countries. RI did continue to have the greatest dispersion of scores reflecting that countries are at different stages of implementing responsible investing within their investing framework. Average country scores ranged from 0 to 94.
The Netherlands remained in first place with a score of 89 (up from 77 the year before). The Canadian and Swedish funds were not far behind scoring 85 and 82 points respectively. Both countries had improved disclosures over the past year. The Nordic countries – Sweden, Denmark, Finland, and Norway – continued to do very well on RI as a region, with all countries receiving scores above the overall average.
The responsible investing factor was assessed by looking at three criteria
1. Responsible investing framework and reporting.
Average country score: 54 (last year 48)
Responsible Investing framework and reporting was again one of the higher scoring components. Sweden continued to stand tall, increasing their average score from 92 to 94 as three of the Swedish funds scored 100 in this area, with even the lowest scoring Swedish fund obtaining a score of 80. This type of consistency was not seen in other countries and is likely reflective of rules for responsible investing implemented in Sweden. Part of this new legal framework is uniform reporting guidelines that impact the largest funds.
On the other end of the spectrum, two of the lowest scoring countries, Mexico and Chile, showed some improvement and saw their average scores increase from 7 and 10, to 18 and 17, respectively. This occurred as more funds in these countries provided disclosures around climate change and included ESG/sustainability in their goals/mission for the fund.
Notable results from this component included:
- 89 per cent of all funds disclosed that they had an established policy/framework for RI
- 77 per cent of all funds disclosed that they had a climate change policy (either as part of the overall RI policy or as a stand-alone policy)
Last year it was clear that while most funds disclosed that they had an RI policy/framework, specifics on targets and measuring outcomes were not as robust. This year we have seen a tangible improvement in funds setting and reporting on these goals.
- 72 per cent of all funds disclosed their goals/targets for responsible investing compared to 56 per cent last year; and
- 57 per cent of all funds disclosed how they have progressed on their responsible investing goals/targets compared to 49% last year.
Questions relating to responsible investing framework and reporting
- Has the fund established a policy/framework for responsible investing?
- Does the fund disclose a climate change policy either as part of the overall RI policy or a distinct stand-alone policy?
- Are responsible investing processes/reports verified by an independent third party?
- Is ESG/sustainability included as part of the mission/values/overall strategy for the fund?
- Are goals/targets for responsible investing disclosed and clearly laid out?
- Does the fund provide how they have progressed on their RI goals/targets (e.g. year over year changes/improvements)?
- Are quantitative KPIs included as part of the progress report on RI goals/targets?
- Does the fund comply with the Global Reporting Initiative (GRI) for reporting purposes?
- As part of the climate change goals, does the fund provide data on its portfolio’s carbon footprint?
- Does the fund disclose the climate-related risks and opportunities for specific investments and/or the total fund?
- If the fund does disclose climate-related risks and opportunities, does the fund follow the recommendations as outlined by the Task Force on Climate-related Financial Disclosures (TCFD)?
2. Responsible investing governance.
Average country score: 39 (last year 34)
Responsible investing governance was one of the lower scoring components, though we did see some improvement this year. For RI to be successfully implemented there needs to be oversight and accountability. For this component, marks were provided for disclosures that clearly laid out where the oversight of responsible investing resides and who is accountable for ensuring that RI policies are implemented. This year Australia joined the list of countries where RI was part of the board’s oversight across all funds (Australia, Finland, South Africa, Sweden, and the UK).
Areas of notable improvement included:
- 71 per cent of all funds disclosed whether RI is part of board oversight (67 per cent last year)
- 65 per cent of all funds disclosed whether there is a designated role/team to oversee the RI mandate for the fund (51 per cent last year)
- 60 per cent of all funds disclosed how RI is integrated at the executive management level (48 per cent last year)
Questions relating to responsible investing governance
- Does the fund disclose whether responsible investing is part of the board’s oversight?
- Does the fund disclose how responsible investing is integrated at the executive management level (i.e., CEO, CIO, etc.)?
- Has the fund disclosed a designated role/team to oversee the responsible investing mandate for the fund?
- Is responsible investing integrated within each asset class team?
- Does the fund disclose whether responsible investing has an impact or is a component of staff compensation?
- Does the fund disclose whether responsible investing has an impact on the organisation’s scorecard?
- Does the fund disclose whether ESG training or education is provided to its staff?
3. Responsible investing implementation.
The responsible investing implementation component was divided into four categories representing the most common strategies.
Average country score: 47 (43 last year)
Exclusion refers to the strategy of using negative screening or enhanced ESG monitoring as part of the investment process. Exclusion was most common in Sweden and the Netherlands. Every fund in these countries used exclusion as part of the investment process and disclosed the criteria used for screening and provided a detailed list of excluded investments.
- 64 per cent of funds disclosed whether a negative screen or enhanced ESG monitoring was used as part of the investment process (61 per cent last year)
- 49 per cent of funds disclosed the criteria used for negative screening (exclusion policy) or enhanced monitoring (44 per cent last year)
ii. Active ownership.
Average country score: 60 (52 last year)
Active ownership refers to engaging with and influencing companies to conduct their business in a way that promotes responsible investing and aligns with ESG factors that the fund is focused on. Included in active ownership is active participation in shareholder meetings and exercising voting rights. Compared to the other implementation strategies, active ownership scored the highest. Even some countries that scored poorly in other components of RI or scored poorly overall tended to score higher on active ownership. This may be because funds starting to implement RI typically focus first on public equities and active ownership is a key implementation strategy for this asset class. Canada had the highest average score for active ownership at 100. This was one area where we saw the largest improvements, especially among funds that “middle of the pack” last year. These funds have started reporting on their engagement activities, some of which use third-party organisations to structure their engagements.
- 71 per cent of all funds disclose an ownership policy that outlines engagement activities with investees (64 per cent last year)
- 73 per cent of all funds disclose a policy for active participation in shareholder meetings and exercising voting rights (60 per cent last year)
- 63 per cent of all funds summarize engagement activities and what the resulting outcomes were (52 per cent last year)
iii. Impact investing.
Average country score: 48 (37 last year)
Impact investing refers to the strategy of investing in opportunities that promote sustainability (eg, renewable energy, green bonds). We saw a lot of positive improvements in this component, especially as many funds started to highlight their green investments as well as disclose targets to increase investment in these areas. Most of the European countries aligned their impact investing with the United Nations Sustainable Development Goals.
- 71 per cent of all funds disclosed that investments were made in companies that promote sustainability (56 per cent last year)
- 57 per cent of all funds provided list or examples of investments made as part of their impact investing program (45 per cent last year)
- 47 per centof all funds utilize or align with the United Nations Sustainable Development Goals (SDGs) (43 per cent last year)
iv. ESG Integration.
Average country score: 32 (27 last year)
ESG integration refers to how funds integrate RI across the different asset classes and the total portfolio. Funds were scored on disclosing RI policies for external managers, for investment/asset class level frameworks and for disclosing the impact of ESG integration across the fund. ESG integration scored the lowest within the implementation component, with slight improvements this year. The Netherlands scored the highest with an average score of 59 with all funds disclosing their RI policy for external managers and all were Principles for Responsible Investing (PRI) signatories.
- 72 per cent of all funds disclosed they were PRI Signatories (63 per cent last year)
- 56 per cent of all funds disclosed RI policies for external managers (including climate change specifics) (44 per cent last year)
- 43 per cent of all funds disclosed that ESG factors are taken into consideration as part of risk management (33 per cent last year)
Questions relating to responsible investing implementation
- Does the fund use negative screening or enhanced ESG monitoring as part of the investment process? If the fund explicitly states that it does not practice exclusion, the marks from this section are re-assigned to the section on Active Ownership.
- Is the criteria used for negative screening (exclusion policy) or enhanced monitoring provided?
- Does the fund implement an exclusion/negative screening/enhanced monitoring for each asset class?
- Does the fund disclose the number of exclusions (e.g. 300 investments are excluded)?
- Does the fund provide a detailed list of excluded investments, individually listing investments that are excluded?
- Does the fund have and disclose an ownership policy that outlines engagement activities with investees?
- Does the fund summarise engagement activities conducted and what the resulting outcomes were?
- Does the fund disclose which ESG factors the fund is focused on or prioritising in its engagement efforts?
- Does the fund provide a breakdown of the engagement efforts undertaken categorised by each ESG factor?
- Is the policy for active participation in general shareholder meetings and exercising voting rights (either in person or by proxy) disclosed?
- Does the fund provide examples of their voting record?
- Does the fund provide the number of shareholder meetings and votes cast?
- Does the fund disclose its policy on nominating board of directors for portfolio companies?
- Does the fund’s active ownership policy outline requirements for board composition?
- Does the fund’s active ownership policy outline requirements for remuneration/executive pay?
- Does the fund’s active ownership policy have an embedded climate change policy?
- Does the fund’s active ownership policy have an embedded ESG policy?
- Does the fund provide access to their voting records?
Responsible investing implementation – Impact Investing
- Does the fund invest in companies that promote sustainability (e.g. microfinance, renewable energy, green bonds)?
- Do the impact investing strategies utilise or align with the United Nations, Sustainable Development Goals?
- Does the fund provide a list or examples of investments that are part of impact investing?
- Does the fund disclose its goals for impact investing for the investments discussed?
- Does the fund disclose the results of impact investing (what was achieved) for the investments discussed?
- Does the fund disclose the dollar value (or % of assets) that impact investments accounted for?
- Does the fund implement impact investing across all relevant asset classes?
Responsible Investing Implementation – ESG Integration
- Does the fund disclose if it is a PRI signatory (i.e. that they participate in the United Nations Principle for Responsible Investing)?
- If the fund does disclose it is a PRI signatory, does the fund provide its annual PRI assessment report (including the summary scorecard)?
- Does the fund disclose its policy for responsible investing for external managers (including specifics such as climate change)?
- Does the fund disclose whether external managers are required to be PRI signatories?
- Does the fund disclose/include the impact of ESG factors on risk management?
- Does the fund use an investment level framework SASB (Sustainability Accounting Standards Board) to help identify material ESG issues/risks for an investment?
- Does the fund disclose how responsible investing is integrated into the investment process for each asset class?
- Does the fund use a third party to assess the ESG performance or compliance of private assets or investments (i.e., GRESB, etc)?
- Does the fund disclose the goal/mandate for ESG integration across the portfolio ($ or % of portfolio)?
- Does the fund disclose how they are progressing on integrating ESG ($ or % of portfolio changes year over year)?
Responsible investment questions asked
Responsible Investment Ranking
“Society grows great when old men plant trees whose shade they know they shall never sit in.”
– Greek proverb
There is increasing consensus that large institutional investors should integrate responsible investing as part of their overall fiduciary framework. While some have argued that a focus on RI is incompatible with the core fiduciary responsibility of generating returns, emerging research, including a recent CEM study, suggests that the two goals are not mutually exclusive.
The assessment of responsible investing (RI) disclosures included 53 questions across the three key components outlined below.
The review encompassed assessing annual reports, responsible investing reports, websites, and various policy disclosures. Given the relatively recent adoption of RI by many funds and the nascent global standards and reporting guidance for RI, the disclosures varied widely across funds and countries.
1. Responsible investing framework and reporting (30% of responsible investing factor score)
Questions assessed whether disclosures laid out how RI fits into the overall strategy for the fund. This included the goals and targets for RI and whether the progress made towards these goals and targets were disclosed. The verification of RI disclosures by independent third parties and alignment with emerging global standards for RI reporting (GRI – Global Reporting Initiative; and TCFD – Task Force on Climate-related Financial Disclosures) was also considered.
2. Responsible investing governance (15% of responsible investing factor score)
For RI to be successful there needs to be accountability. The responsibilities for oversight and implementation need to be clearly laid out. Important considerations in evaluating disclosures around governance include whether RI is part of the board’s oversight and how it is integrated within the organisation including executive management oversight and whether there is a dedicated role or team.
3. Responsible investing implementation (55% of responsible investing factor score)
Evaluation of implementation disclosures covers the key policies that funds use to implement RI. Funds are scored on whether actual activities and specific metrics are provided. Key implementation policies included in the assessment are:
Disclosure of screening and monitoring criteria used to assess eligibility of investments. For instance, some funds exclude tobacco companies and list excluded investments.
- Active investing
Disclosures around ownership policies that outline how funds engage with investees to bring about change that aligns with RI investing policies, values, and goals. For instance, funds are scored on whether disclosures around voting records, engagement statistics, etc. are provided.
- Impact investing
Disclosures on how funds invest to promote sustainability. Assessments include whether key focus areas or goals are provided, metrics such as percentage of portfolio impacted, and examples of investments (i.e., investing in renewable energy to reduce carbon footprint).
4. ESG integration
Disclosures related to the various ways responsible investing is implemented across the portfolio, including whether RI is part of the criteria for evaluating external managers and if it is included in risk management processes.
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