Sustainability Digital – March 2021

Pension funds get cracking on diversity

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Pension funds are finally waking up to the danger of the diversity gap, realising they can miss out on pools of talent that would improve decision-making in their organisations if they stick to employees whose backgrounds cause monolithic thinking.

The problem in the industry is large, with gender, age and background diversity all lacking. Few investors are still in denial. They know there is a problem, the challenge is how to fix it. Now a handful of funds are showing exactly how that’s done.

There are plenty of examples of action. Canada’s C$90 billion ($69 billion) Alberta Investment Management Corporation, AIMCo has a policy objective “to achieve gender parity” on its 11-member board of directors, four of whom are now women. In Sweden, where a gender pay gap persists despite policies in place to mitigate it the SEK562 billion ($66.8 billion) AMF Pension pledged in its 2016 Sustainability Report to “reduce pay differences between women and men by 2018”. Elsewhere, massive Dutch scheme ABP, with nearly €400 billion in assets, is addressing both gender and age diversity with targets. It has even gone well beyond its target of two female trustees, as five members of its 13-person board are now women. It is currently addressing age diversity, pledging to appoint one member under 40. The scheme’s current youngest board member is 45.

In the United States, $220 billion California State Teachers’ Retirement System is leading the charge, looking at its own investment team make-up, engaging with portfolio companies on diversity and hosting diversity forums that bring together investment and corporate executives to discuss how to better capitalise on the abilities of the diverse modern workforce.

Closing the diversity gap requires pension funds to do away with entrenched, and often unconscious, biases to consider candidates from non-traditional backgrounds.

“Pension funds need to ask themselves if their culture is open to attracting people from different backgrounds with different experiences, styles and ways of thinking,” says Caroline Muste-Merks, director of fiduciary advice at MN, fiduciary manager for the €70 billion ($81 billion) Pensioenfonds Metaal en Techniek.

These investors are tackling diversity because it improves returns. Diversity of thought and experience reduces risk and boosts performance because if everyone thinks the same, risks and opportunities will be missed. In fact, studies show a direct link between diversity and corporate performance.

Updated research by Credit Suisse finds that diversity improves corporate returns by 3.5 per cent.  If that’s the case for the companies in which pension funds invest, it must surely be the same for the funds themselves, argues Joanne Segars, chief executive of the UK’s Pensions and Lifetime Savings Association (PLSA) which has just launched ‘Breaking the Mirror Image’, a campaign to increase pension fund diversity.

If investors view diversity in this context, rather than as a special interest, they are much more likely to be galvanised into action says Aeisha Mastagni, a portfolio manager within CalSTRS’ corporate governance division. The fund for California teachers walks the talk, with 50 per cent of its investment team made up of women.

“Diversity is not a social issue for us,” Mastagni says. “It is about mitigating the risk of group-think.”

Angela Rodell, one of the few female chief executives of a public fund the size of Alaska’s $60 billion Permanent Fund oversees the portfolio alongside a 20-member investment team that is ethnically diverse, gender diverse (a quarter are women) and aims to reduce groupthink.

“Women ask different questions to men and educational diversity stops just Harvard-think,” Rodell says. “It leads to robust discussions that turns into better performance.”


Such ethos is driving forward-thinking funds to go beyond box ticking to introduce policies and practices to solve the problem. The process compares to how many funds have introduced climate policies in recent years, argue Olivia Seddon-Daines and Yasmine Chinwala, co-authors of a recent report from think tank New Financial titled Diversity from an Investor’s Perspective.

The journey begins with gathering data about the makeup of internal staff. As the saying goes, you can’t solve a problem until you know what it is. The UK’s £3.3 billion ($4.3 billion) Environment Agency Pension Fund has just begun publishing the gender and ethnic makeup of its pension fund employees. Recruitment processes to address imbalances with the help of headhunters and shortlists are the next step, followed by targets.

It’s not all about gender and ethnicity. Expanding beyond so-called Harvard-think within investment teams is another consideration. Would CalSTRS ever employ someone without a finance degree on their investment team? ‘Absolutely’, comes the emphatic response.

“A number of people in the investment office don’t have finance degrees,” says Anne Sheehan, director of corporate governance at CalSTRS, herself a political science graduate.

But internal change won’t necessarily make it easier to recruit a diverse staff if it isn’t accompanied by a shift in the way an organisation is perceived from the outside. CalSTRS’ Mastagni says pension funds often still give the impression they hire only from a select pool of finance graduates. She suggests funds need to do more to clearly express how they truly hire.

“Folks get scared away; they think it is all maths and finance. But in corporate governance, private equity or real estate, you are working with outside partners, which requires a different skillset to just crunching numbers,” she explains. In remote Alaska, the Permanent Fund now runs an internship program to encourage more Alaskans into finance; technology is also helping broaden the fund’s recruitment base.

It’s lonely at the top

But the challenge of ensuring diversity in junior roles pales in comparison to ensuring diversity, particularly gender diversity, at the senior level. Research by State Street (Addressing-gender-folklore) shows women occupy only one-fifth of senior investment roles at large investors such as pension funds and endowments – although that is much better than at asset managers, where State Street found women hold just 7 per cent of senior roles. It’s an area where CalSTRS leads its peers, with six female investment directors in an 11-member cohort.

“If you look at colleagues, they have a difficult time trying to get to the level of representation we have in our senior ranks,” Sheehan says.

Alaska Permanent’s Rodell believes the problem is that senior positions are difficult to combine with family life.

“It’s a challenging road for women because they have to make certain choices about family and it can hinder their career track,” she says. The solution lies in proactively addressing work-life balance and promoting flexible working practices, while analysing retention rates, internal promotions and pay scales to ensure women are on the same deal as men.

“Our pay scales are public and we don’t have any disparity between men and women,” Sheehan says.

UK pension fund NEST is now accompanying its target to have women fill a least 30 per cent of its executive and director roles by autumn 2019 with more flexible working policies. It also runs a mentoring program in which employees offer guidance and insight to younger staff. Competing in a man’s world is something Alaska’s Rodell had to teach herself.

“You need the confidence to speak up and insert yourself, and that can be difficult at times,” she says.

Role of the board

Increasing pension board diversity is a crucial piece of the puzzle. In the UK, 4 in 5 board trustees are still men, the PLSA states. It’s the same in the Netherlands. A 2014 survey into gender diversity at board level among the 200 largest Dutch pension funds found 35 per cent of boards had no female trustees, and 60 per cent of the schemes lacked trustees aged under 40 – with no change from earlier findings, in 2011.

One explanation for the lack of progress is that pension funds rely on their boards for experience, financial knowledge and stability, leading to fears that diversity could be forced and upset this balance. This is Rodell’s view, shaped by her role as a trustee at Alaska before she made CEO. Only one of Alaska’s six board members is a woman, and turnover is low because each member serves a four year term.

“Our board isn’t diverse. We don’t even have Alaskan natives,” she says, questioning whether actively recruiting a diverse board would ever take precedence at the fund. “It would be difficult, but not impossible. If it was a priority it could be done.”

Even if pension funds are willing to shake up the board, their ability to attract diverse, particularly young, candidates isn’t guaranteed. Again, outside perceptions are critical.

“In the Netherlands, funds are struggling, especially the smaller ones, to get young board members,” MN’s Muste-Merks says.

Yet this, too, is possible. In a deliberate strategy to increase diversity, the £1.3 billion Accenture Retirement Savings Plan, a defined contribution scheme for employees of the management consultancy, has just selected a 24-year old to join its eight-member board.

“We have a huge number of people aged 20-38 in our scheme and we needed to reflect this,” said trustee chair Peter George, who sifted through 40 internal applications for the sought-after role before selecting Anna Darnley, who works in Accenture’s digital business.

Darnley said: “I don’t have a background in finance and I thought this would be detrimental to my application, but my expectations have been turned on their head. My motivation is to increase engagement with our members on investment and savings decisions. I think there is a real lack of financial education.”

Taking on investee companies

Internal diversity is only one side of the coin; investors are important drivers of such initiatives in their investee companies, too. But New Financial finds that only 41 per cent of its sampled 100 asset owners engaged with investee companies on the issue.

One reason could be a reticence among investors to engage on diversity with investee companies if they haven’t begun to tackle the problem in-house, governance expert Deborah Gilshan says. Recalling her experience as co-chair of the Institutional Investor Group at the 30% Club, an organisation that campaigns for more women on the boards of FTSE companies, she urges pension funds to take on both challenges together.

“Investors thought they needed to get their own house in order before they could engage with companies on diversity,” she says. “But diversity moves up the agenda faster if it is viewed internally and externally at the same time.”

A growing body of research shows that failing to engage with portfolio companies and asset managers on diversity hits returns; for example, McKinsey’s 2015 Diversity Matters report that found gender and ethnically diverse companies outperformed.

CalSTRS has championed diversity in its $119 billion global equity portfolio by engaging with companies through its governance rights. It makes its point through voting or shareholder proposals, in an approach that allows other investors to coalesce around an issue and give a forceful message back to corporations’ boards. Sheehan calls it an “ongoing discussion” but, in reality, it’s a fairly relentless pursuit of change.

“If there isn’t any progress, we don’t let up,” she says, evoking CalSTRS’ early calling-out of the US tech industry, which resulted in a shakeup in Facebook’s all white, male board in 2012.

“When investors peel back the layers and look at the nomination processes and the pool of talent that corporate boards are recruiting from, companies understand the concerns from a shareholder perspective,” says Gilshan, who led the UK’s £25 billion railway pension fund Railpen’s corporate governance and shareholder engagement policies for seven years.

In a toughening stance, CalSTRS will now vote against re-election of directors on companies’ nomination and governance committees if they continually fail to fill open seats on their boards with female representatives.

“We don’t believe it is a supply issue. There are plenty of qualified ethnically diverse women who could fill these seats,” Mastagni says.

In a similar strategy, A$110 billion ($82 billion) AustralianSuper has put all-male company boards on notice, voting against the re-election of male directors to already all-male boards.

 Asset managers

Leading pension funds are also putting pressure on their asset managers to improve on their diversity. Passive managers have done more than others, but an old boys’ network is still pervasive. According to data from the $182 billion New York City Retirement Systems’ Bureau of Asset Management, manager of the city’s five retirement funds, 83 per cent of US portfolio managers are white.

Private equity and hedge funds are at the bottom of the pack. Bloomberg found that women account for only 11 per cent of senior managers in the 10 biggest private-equity firms.

The New York City Employees’ Retirement System now asks every investment manager pitching for mandates to disclose the diversity of their leadership and investment teams. Illinois Municipal Retirement Fund and Public School Teachers’ Pension and Retirement Fund of Chicago, and NEST says it is planning to introduce diversity questions in its selection process.

It’s time for asset managers to pay attention, governance expert Gilshan says.

“If an asset manager is going to pitch for business with an all-male line-up and the client has clearly expressed an interest in diversity, the asset manager can’t be surprised if the pension fund wants to find out if their interests are really aligned,” she says.

Some asset owners have gone even further, integrating diversity into their portfolios. New Financial found 1 in 8 asset owners promote diversity by allocating capital to diverse groups. New York City retirement system invests $12 billion in firms and businesses owned by women and members of ethnic minorities, in a commitment that it has increased by 25 per cent since 2013.

Sweden’s AP2 and the Netherlands’ PGGM are aligning their investments with the United Nations Sustainable Development Goals, which include gender equality, and earlier this year, Japan’s $1.2 trillion Government Pension Investment Fund announced plans to allocate 3 per cent of its passive domestic equity – about $9 billion – to ESG indices, including MSCI’s Japan Empowering Women Index, which tracks companies that encourage women to work.

The value of niche investment products, such as State Street’s Diversity Index (SHE) ETF, has grown from $400 million in 2014 to $600 million in 2016, according to research from Veris Wealth Partners and Women Effect.

Pension funds take heart. Tackling diversity is possible. It just takes commitment. “I am very proud to be a part of this,” enthuses Accenture’s George. “This is a milestone, and the effectiveness of our board has increased significantly as a result.”

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