Pensions World

Lindsay Tomlinson, NAPF chairman, on the necessity for pension schemes to maintain a wide focus when it comes to investment

Pension schemes are genuine long term investors. Their time horizons stretch out for decades and can go out to 50 years and more.

But one of the concerns expressed by politicians following the financial crisis is that investors take a short term view. That, rather than taking the long view, investors pressure investee companies to deliver short term performance, are prepared to sell out to opportunistic takeover bids and prevent businesses from thinking long term. The concern about short termist investor behaviour is expressed in a Department for Business, Innovation & Skills paper entitled A Long-Term Focus for Corporate Britain.

As is usual, this paper addresses the issues from the point of view of a corporate. It asks questions about board behaviour, about the role of shareholders, about directors’ pay and about takeovers. Nowhere does it talk about shareholders’ needs and the pressures they face. But it is an important paper. It may lead to further regulation of pension scheme investment.

Short term view

The questions I wish to answer are:

• Are politicians right to worry about short termism in capital markets?
• Why should long term investors like pension schemes take a short term investment view?

Firstly then, is short termism an issue in capital markets? Cries about investor short termism have been with us for as long as I can remember. Writing in 1936, Keynes observed that “the actual private object of the most skilled investment is to beat the gun as the Americans so well express it, to outwit the crowd, and to pass the bad, or depreciating, half-crown to the other fellow”. But I think it has got worse. There is a real short termism issue.

Secondly, why should pension schemes take a short term investor view? I think there are four root causes:

1)    The information age: in an age of instant information and gratification, having a view that lasts more than two minutes is next to impossible.
2)    The investment value chain: there is a long chain of agents between the beneficiary and the investee company. The length of the investment view defaults to the view of the shortest term agent in the chain. Seeking to address this issue has been the Myners’ agenda, which pension schemes have now pursued for nearly ten years.
3)    Market based accountancy and solvency standards: anyone who has read my stuff in the last couple of years will know that I can “bore for England” on this but it is a real issue. The time horizon of 50 year pension schemes now extends no further than the date on which the sponsoring employer’s balance sheet is next struck.
4)    The primacy of markets: in the last 30 to 40 years the place of the market in our social, political and economic hierarchy has been transformed. We are all taught that “deep, liquid, capital markets know best”. Market practitioners are extraordinarily well rewarded and their rewards come from transaction activity. The natural result is market pressure to take a short term view and to transact. And this falls on all elements of the investment value chain.

Politicians cannot have an unfettered belief in deep liquid capital markets and then complain about short termism. It follows that if one worries about short termist behaviour, as I do, one needs to get to grips with capital markets’ ideology and activities, rather than just berating the end investor.

Pension schemes are long term investors and want to be free to act as such.

Lindsay Tomlinson is chairman of the National Association of Pension Funds;