Pensions World

Lindsay Tomlinson, NAPF chairman, looks at the issue of investment from a pension scheme perspective

Expect to hear a lot more about short termism in the short to medium term. Corporations and policymakers think that investors take short term views and that this damages longer term economic development. What an irony it is that pension schemes are accused of short term thinking. We are the ultimate long termists, hoping to invest for periods of 50 years and more to meet benefit liabilities which will not crystallise for decades.

I have tried to think through the issue from a pension scheme perspective. Everyone else in authority approaches the issue from the perspective of a company with supposedly short term shareholders. But no-one asks those shareholders (ie us) what we think about it.

Taking the longer view

There are three main reasons why long term pension scheme investors might be taking views which are excessively short term:

1. Modern life and the age of trivial information The internet and media barrage is changing the way we think. Sitting on your hands and not transacting is becoming increasingly difficult in our sound bite, information overload world. Just wait for a new reality TV show – Celebrity Pension Fund Manager.
2. The investment value chain There is a long chain of agents between the end beneficiary and the investee company. These agents have their own objectives and are bound to be judged over human, comparatively short term, timeframes.
3. Our obsession with deep liquid capital markets Over the last 30 years we have convinced ourselves that market based capitalism is the best economic system. The mantra is that “deep liquid capital markets know best”. But such markets need transactions. Those working within them need to stimulate transactions in order to be paid. This system is a very powerful “transaction engine”. My message is – do not aim for deep liquid capital markets and then complain about short termism.

If we agree that investors need to take a longer view, what might we do in each of the areas I have identified?

Although we may worry about information overload, we have to accept there is no remedy for modern life. Information overload will not go away. Maybe a spot of yoga might help.

The investment value chain has been what Her Majesty’s Treasury has focused on throughout the last ten years. We have done a tremendous amount of work on this. If I had a pound for every time I had thought about it, I would not have to worry about pension scheme investment. All I can say is that if we have not sorted this, it is not for lack of trying.

What about deep liquid capital markets and the transaction activity they demand? I think this is something we should work upon. Every single change in the last 30 years has been made to make markets more efficient and liquid. If we do not like the results, we need to think again. And policymakers are so doing. For example, the idea of a Tobin tax on transactions is still under consideration. This is notwithstanding the fact that the UK equity market already has its very own Tobin tax, aka stamp duty, which has merely stoked the derivatives market and made our market much more opaque. There are plenty of other ideas we can explore.

Magic bullet

The immediate danger is that politicians are looking for a magic bullet solution – one piece of regulation which will change the world and make us all true long termists. Such a solution does not exist. But if we do agree there is a short termism problem, a series of small nudges to the investment value chain and to deep liquid capital markets could well do the trick.

And certainly as pension schemes, we would be strongly in favour of any moves which favour those able to take the long term investor view.

Lindsay Tomlinson is chairman of the National Association of Pension Funds;
lindsaytomlinson@blackrock.com