In the second in a series of articles aimed at empowering trustees, our expert contributor describes how to diplomatically sidestep problems when your good in-house team isn’t right for a complex task

Pensions insider

Have you ever worked with a Pippi Longstocking?

No, I don’t mean a nine-year-old with superhuman strength. Pippi personalities in the workplace are common, especially among fresher faces. Their qualities are mostly constructive; they are enthusiastic, creative, and always ready to try something new. Their unofficial motto? “I’ve never tried that before, so I think I should definitely be able to do it.”

But this attitude can often lead a Pippi to leap without looking into a situation that is beyond their capabilities.

The problem
Every professional wants to learn and grow. This is especially true in our line of work, and even more so when thrillingly large numbers are involved. Many ambitious self-starters are desperate to prove themselves by acing a new challenge on their first try. But it takes more than a can-do attitude to competently handle a market-defining transaction.

“Many ambitious self-starters are desperate to prove themselves by acing a new challenge on their first try. But it takes more than a can-do attitude to competently handle a market-defining transaction”

As a trustee, the last thing you want to do is to blindly hand over a huge interest-rate hedge to a team with no experience of implementation. The second-to-last thing you want to do is inadvertently offend the professionals working hard for your fund. So what can you do as a pension fund board if you don’t want to entrust a task to investment staff? 

The case
A few years ago, I was asked for advice by a pension fund that relied on a progressive investment staff led by nationally known professionals. As one of the most renowned in Europe, this team recognised, early on, the importance of expertly controlling interest-rate sensitivity. 

There was a very open relationship between the team and the board, which is why they dared to propose buying four billions-worth of long-term interest-rate swaps – by far the largest transaction the fund had ever considered. 

The investment committee and the board were open to the proposal, so the board’s chairman decided it was the ideal subject for an upcoming brainstorming session. He knew that it would be an opportunity for the board to discuss how to move forward without staff being present and notes being taken, thus avoiding any potential offence before things took off. 

During the session, the chair mentioned a course he had attended. There, he learned that there is a distinction between average-sized transactions and those that can be market-defining. In the latter case, of course, there are strong forces at play. To play in the big leagues, it is crucial to be able to compete with major international investment banks. 

The chair believed a transaction of this magnitude was too big for the investment staff to execute. However, he was wary of insulting the loyal team by forcing them to sit this one out. How could they minimise unnecessary risk while keeping all sides happy?

“Keep the door wide open for their development, though, because a team with big ideas and the skills to match can be unstoppable”

The process
It was clear that hiring a well-known management agency or trading house would not only be prohibitively expensive but could also damage the relationship with the investment staff. In any case, asking an external party to run the show would by no means guarantee a successful outcome. 

Fortunately, it just so happened that one of the board members had experienced a similar situation and asked to guide the process – with me by her side. She was aware of my extensive experience with large transactions and we agreed to offer the investment staff a training course in the relevant skills they would need to handle a transaction of this size. It would be foolish to deny them a valuable opportunity to develop their skills and strengthen their bond with the board. 

We then consulted with the investment committee and decided to use a prominent investment manager’s trading floor for a fixed fee to carry out the transaction. Everyone knew where they stood, and the market had no foreknowledge that a large transaction was on its way. As a bonus, the investment staff were able to watch the experienced traders carry out a market-defining transaction, thus adding to their skillset. 

The result 
Those familiar with the Wall Street thriller Margin Call know that it paints a pretty accurate picture of how control, discipline and large transactions work on a trading floor work. Now imagine that film ended in triumph, not tribulation.

The purchase of four billion in forward-starting interest-rate swaps was arranged in two-and-a-half hours on a Tuesday morning. Because the fund was one of the first to implement an interest-rate hedge, the market didn’t entirely discount the risks of selling long-term swaps, as they did not anticipate that interest rates would dive in the years to come.

The investment staff loved the experience and admired the way such a significant transaction was handled. The board got the thumbs up for accepting and professionally implementing their proposal, and for delivering such a worthwhile opportunity to learn.

A ‘do-it-yourself’ attitude might appear to be an advantage at first glance, but it can also be a pitfall. Pippi Longstocking personalities are talented and well-meaning, but it’s usually worth letting them learn from more seasoned professionals who can be trusted to run the show.

Keep the door wide open for their development, though, because a team with big ideas and the skills to match can be unstoppable. The chair and board member who recognised the opportunity to chart a new and innovative course should be commended.

The writer is a former investment director of a large European pension fund. This is the second article in a series aimed at empowering trustees to solve grey-area problems. Have a comment or want to contribute anonymously to this series? Please e-mail in confidence to pensions-insider@ipe.com