How pass-through voting strengthens pension plans' investment strategy
This blog is an excerpt of our industry-leading white paper on pass-through voting. For exclusive insights on how pass-through voting works, download our white paper.
When it comes to a pension plan's proxy voting activity, it is important to know whether the plan invests through segregated mandates, pooled funds, or a mixture of both.
Pension plan scenario #1: where segregated mandates are held alongside pooled funds
Plans that own holdings through a segregated mandate tend to implement a voting solution that aligns with their overall investment objectives. To deliver on this strategy and ensure that they don’t miss significant votes, they will use a proxy advisor with either a template or custom voting policy — choosing to override any recommendations on votes where they have a different view.
However, due to the ownership structure of pooled funds, the plan's fund manager votes on the holdings on their behalf. Votes will align with whichever policy the fund manager has chosen to implement; often, votes are unlikely to match the plan’s chosen voting policy, resulting in gaps in alignment between the fund manager and the pension plan. Voting alignment is a critical issue for the industry when you consider that each pension plan has multiple fund managers investing on their behalf.
These voting mismatches result in votes for part of the pension plan’s portfolio aligning with their investment policy (segregated mandate), and the rest aligning to the fund manager’s voting policy. In some instances, there is a crossover in the holdings, and the pension plan finds conflicting votes on the same proposals. Regulation in the UK points to this potentially causing issues from a fiduciary-duty perspective.
Pension plan scenario #2: pooled funds only
Some pension plans don’t have enough assets to invest through a segregated mandate and invest exclusively in pooled fund structures for all their assets. However, in doing so, they lose all voting rights on that capital invested. Pension plans in the UK and other European countries are now encouraged by regulatory bodies to adopt vote policies or “expression of wish” policies to hand to their fund manager.
But votes cast by the fund manager will only align with the vote policy or expression of wish for a portion of the plans they represent, since they only have one vote. By working together to close the gap in alignment between fund managers and pension trustees, trustees can rest assured they are doing the right thing for their members.
Pass-through voting allows pension plans invested in a pooled fund to vote the shares in proportion to the AUM they have invested. This ensures a plan's votes are cast in line with its investment policies, not the fund manager's voting policies.
With pass-through voting, a pension plan can apply a voting policy that aligns with its stewardship policy, ensuring it doesn't miss any votes. Alternatively, the plan can set its fund manager as the default voter on all proposals, opting-in to override the fund manager's decision where it has a specific interest or opinion.
Ultimately, the voting rights remain with the fund manager since the shares are in their name; therefore, votes are executed as a “split” or “partial” vote at the company AGM.
To explore real-world examples of the scenarios described above, download our pass-through voting white paper.