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IPE Views: Lessons learned on the UK Invensys Pension Scheme

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Robin Claessens, former chief executive and CIO of the UK’s Invensys Pension Scheme, talks about the lessons he learned overhauling its management structures

I joined Invensys Pension Scheme (IPS) at the end of 2008 and accepted the mandate as their chief executive and CIO (CIO for two years only).

As part of a 10-year transformational plan initiated in 2000, the board of IPS changed the business management model of the scheme in 2008.

The initial mandate was to set up an executive office, mirroring a corporate management model, to run what effectively is a large enterprise through a small executive team, as the scheme had £4bn (€5bn) of assets and 90,000 members.

The scheme was not just supposed to become a performing business, it was supposed to embody a joint strategy between all stakeholders, integrating funding, investment strategy and corporate sponsor covenant risks.

During that journey, we experienced a number of events – some professional and technical, some more subjective and others personal. I have endeavoured to translate these events into a number of concise lessons, which I think apt to share with you.

1) A UK DB pension scheme is a proper and independent business – it should be managed as such

I used to hear, and sadly still hear, that UK corporate DB pension schemes are considered as a weight, a cost centre, a liability – that the only way to ‘fix’ them is by paying contributions and minimising costs rather than managing them as a proper business. Pension schemes are long-term investors and therefore have the time to be successful businesses.

A first step to implement a successful business management model is to focus on the pillars of the scheme – its governance. But how do you ensure you are focussing on the right aspects of the scheme’s governance? One suggestion is to answer the following question: “what is there to stay?”

  1. The decision-makers: Hire experienced and expert scheme-, industry- and role-specific trustee directors. That is crucial because they are the ultimate decision-maker, unlike in the corporate world (more on that later)
  2. Risk management: Build your governance and executive structure adopting a holistic and integrated pension fund risk approach – be open and seek input from all stakeholders, your team members, your advisers and your portfolio managers when doing so
  3. High-impact/high value-add activities: Hire in-house expertise/experience in the high-impact/high value-add activities of the scheme
  4. Complementary advice: Complement your in-house skills by investing in strategic, tactical and execution advice of quality, especially when you have a small executive team

2) Doing it in-house and cheaper doesn’t always create value

Because you can do it more cheaply in-house doesn’t mean you are better at it and certainly doesn’t mean you are able to create more value. A scheme’s absolute cost is still too often viewed as a key metric when considering pension strategy. Weigh the impact of growing your in-house capabilities on the executive team’s job.

I have seen, and still see, too many chief executives and CIOs who spend more time on HR and organisational matters than strategic asset allocation, for example. Too great a size and complexity of the organisation can kill competitive advantages and flexibility.

  • Short-termism creeps in despite being a (very) long-term investor by nature
  • Herd mentality – for example, the asset manager performance-review process is simplified to the extreme by blindly following simple benchmarks because the decision-making process within the organisation is too complex

3) Portfolio managers should become your trusted advisers

Remember, they manage significant sums of money on your behalf. Should you, therefore, only call them from time to time? Creating an ongoing and trusted relationship with asset managers proved to be extremely valuable to IPS’s ALM activities, investment and risk management, and trustee and executive education.

The continuous and trusted aspects of the relationship were achieved through very regular communication – at least every other week, and, at times, every other day with the key managers (the LDI manager in IPS’s case). That frequency, depth and intensity of communication had the effect of keeping them on their toes. This continuous dialogue (not nagging!) creates constructive pressure.

4) Raise your hand when the going gets tough

Finally, leadership is premised on the exercise of good judgement. Good judgement is best achieved when balanced between professional, personal and emotional circumstances is achieved. When the balance breaks, and you feel your good judgement capability might be impaired, raise your hand, inform the chairman, the board and your mentor of what you are going through. Forewarning allows for planning. The chairman and board will ensure you and the team are backed up.

Robin Claessens is managing director of investment consulting at Redington. This piece is an excerpt from ‘Pensions, management and leadership: 14 Lessons from Invensys pension scheme’s former CEO/CIO’

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