Business, Innovation and Skills CommitteeWritten evidence submitted by USS Investment Management Limited

Please find additional information following my recent appearance at the BIS Select Committee inquiry into the Kay Review of UK Equity Markets and Long Term Decision Making on 26 February 2013.

We provide below additional information in response to two questions posed by the Committee Chairman. We also highlight some key points that the Select Committee should consider in its deliberations. Finally, we provide information requested on USS’s voting statistics requested during the discussions.

Q135/Q136 Chair: Do you feel that organisations were sufficiently consulted by Professor Kay?

We feel that the voice of pension funds—the asset holders for many of the assets in the UK—could have been better heard. Unfortunately, most pension funds lack the resources to contribute fully to such consultations and will almost invariably have their voices drowned out by better resourced intermediaries who may have a vested interest in the status quo. Those pension funds that are heard are usually the large ones including USS, BTPS, and RailPen, the funds that tend to be most actively involved in debates around long term investment and have the internal resource to do so.

We would also note that in our view, the brief given to Professor Kay was too focussed on one aspect of the investment universe—namely UK equities. Pension funds have a broader asset allocation, and in most cases the allocation to UK equities is decreasing. The inability to look beyond listed UK equities (eg to private equity, infrastructure and property for which stewardship and long-termism are also vital) has minimised the possible effectiveness of the review in terms of its benefits for UK investors and society.

Q138 Chair: You also said to Professor Kay that “there are likely to be different solutions to the agreed problems.” Now, given the fact that we are trying to hold an inquiry to come to an agreed solution to agreed problems, what exactly did you mean by that? In effect, what would your solution be to what I think are generally agreed as the problems?

It would not be sensible for government to try to dictate one approach or “silver bullet” to address the current problems with long term ownership/stewardship, and different funds will find their own way of achieving this. We highlighted in our joint submission with two of the other large UK pension funds (BTPS and RPMI), that we have each adopted different models, none of which involves outsourcing stewardship functions to external investment managers.

USS has adopted a largely in-house investment management and stewardship function.

Railpen’s investment management function is entirely outsourced with stewardship led internally with a partial outsourcing to a specialist provider.

BTPS’ stewardship is undertaken by Hermes Equity Ownership Services (EOS) which sits within the asset manager BTPS owns and which otherwise manages only a portion of BTPS’ assets.

For the smaller UK pension schemes who decide to delegate their responsibility for stewardship, we recommended efforts should be made to form collaborations between asset owners as this provides a mechanism to both reduce costs and increase the impact of such activities. USS, though itself a relatively large scheme, has benefitted by establishing a voting and engagement alliance with RPMI Railpen.

We also recognise there may be other solutions, and we would welcome our peers working to develop these. In addition, there are a number of formal collaborations where pension funds and asset managers work together on stewardship and other issues.

The International Corporate Governance Network1 is collaboration between investors mainly focussing on improving global standards in corporate governance.

The UN backed Principles for Responsible Investment2 operates an Engagement Clearing House, where signatories can get join together to engage with companies on specific issues—this is a kind of ‘a la carte’ investor panel.

Eumedion3 is a collaboration between Dutch investors which focuses on improving standards in companies in that market.

The Australian Council of Superannuation Investors4, is an exclusively pension fund group which engages on behalf of its pension fund members to improve governance and other long term issues.

The Institutional Investors Group on Climate Change (IIGCC) 5 is a pan European collaboration focussing specifically on how the long term issue of climate change, and shorter terms policies to address it, could impact pension funds and other investors.

These are just some examples of where pension funds have come together to find solutions to specific issues related to their investments.

Key Considerations for Encouraging Longer Term Investment

The following are a number of key points we believe the Select Committee should consider in its response to the Kay Review.

Leadership from the top: we need to see board members taking the lead in terms of a long term focus at corporations, and trustees taking a lead at pension funds. This means the directors/trustees have to have the requisite skills to challenge management and the financial services chain.

IFRS and pension regulation: The introduction of IFRS/mark to market accounting for pension funds has exposed funds to increased volatility and some difficulty in incorporating assessments that markets have overshot (in either direction) or that future income streams are not impaired to the implied degree. Such volatility and the potential introduction of Solvency II will be detrimental to investment in risk seeking assets such as public equities and other “risky” assets, including infrastructure—with adverse consequences for growth and for the affordability of adequate pension provision.

Investor Forum: Pension funds and other asset holders are less likely to be conflicted, therefore should take a central role in any investor forum or vehicle established for collaborative engagements. The forum should also be adequacy resourced, and needs to be free from the potential conflicts of interest which may exist within representative bodies for the wider industry.

Remuneration: should be appropriately structured to encourage executives to manage business for the long term rather than for quarterly targets, and for investment managers to invest for the long term.

Pension fund scale: UK pension funds are in general too small to adequately resource their stewardship operations. There is therefore too much reliance on intermediaries, which increases cost and thus decreases the return to pension members. Consolidation in the pension sector would increase professionalism and capacity to engage more fully in stewardship, as well as benefitting members (and taxpayers for public schemes).

Infrastructure: The UK government and pension funds both wish to engage in other forms of long-term investment, including ‘illiquid’ investments such as infrastructure. USS is looking to invest increasingly in long-dated, inflation-linked income streams, in areas such as infrastructure, but there are some impediments to fulfilling this objective.

USS Voting Statistics 2012

Global Voting 2012

The fund regularly votes >92% of its equities under management in the following markets: UK, USA, Japan, Australia, France, Netherlands, Germany, Switzerland, Spain, Belgium, Luxembourg, Brazil, Taiwan, Korea, and Russia. The fund may vote in other markets eg where we have a large holding, there is a material vote, or at the request from the portfolio manager.

The fund has processes in place to recall shares from lending ahead of important voting events, and/or where we are a significant shareholder.

All votes are reviewed and analysed by the in-house RI team.

The fund usually writes to companies to explain the rationale behind votes against management, ahead of the meeting, where possible. The main issues highlighted include independent representation on the Board and its committees, auditor independence, misalignment of pay with performance, minority shareholder rights, dilution concerns, lack of transparency and disclosure.

2012 Global Voting Statistics

13,937 resolutions voted


2010: 12,153)

1,128 events

(2011: 1,170;

2010: 1,118)

934 companies

(2011: 961;

2010: 892)

Breakdown of how we voted on 13,937 global resolutions:



12,199 res

(2011: 88%;

2010: 89%)



787 res


2010: 4%)



951 res

(2011: 6%;

2010: 7%)

This represents “voting against management”6 at least once at 54.9% (513/934) of companies during the year.

UK Only Statistics

USS voted 10,113 resolutions at 823 events at 654 UK companies in 2012 (including FTSE All Share, AIM, Fledgling and Plus market companies)

Breakdown of how we voted on 10,113 UK resolutions



9,410 res




284 res




419 res


This represents “voting against management”7 at least once at 341/823 UK events, and at 49.1% of companies (321/654) companies during the year.

15 March 2013






6 Includes against, abstain and withhold

7 Includes against, abstain and withhold

Prepared 24th July 2013