The trustees of British Airways’ pension schemes have agreed to outsource all directly managed assets to BlackRock in the largest OCIO deal to date in the UK, bringing to an end one of the country’s most experienced independent in-house teams.
The move means dramatic changes for the 42 members of the BA Pensions in-house team, many of whom have been in place for well over 10 years.
Employees of provider British Airways Pension Investment Management Limited (BAPIML), including CIO David Stewart and deputy CIO John St Hill, have transferred to BlackRock, alongside some from the administration unit. The property team under Paul Scott also transfers to BlackRock, as reported by our sister publication IPE Real Assets.
BA Pensions declined to say how many staff were affected. The remaining BA Pensions staff will form part of a dedicated strategic client team at BlackRock that will focus solely on the BA schemes, following the precedent of other large fiduciary deals in the past.
Fraser Smart, former chair and CEO of BAPIML, was intending to leave his role by September, a parliamentary committee was told earlier this year, in connection with a hearing on the appointment of his wife, Sarah Smart, as permanent chair of the Pensions Regulator.
IPE understands that the outsourcing deal follows protracted negotiations between the BA trustees and BlackRock.
It covers £21.5bn (€25bn) in assets, representing the combined uninsured assets of the Airways Pension Scheme (APS) and New Airways Pension Scheme (NAPS), two of the UK’s largest corporate defined benefit (DB) pension schemes. The agreement is the largest such fiduciary mandate in the UK.
BA Pensions cited several reasons for deciding to appoint an external investment manager, including intensified regulation, higher operational costs, and increased investment complexity.
It also said the investment needs of its maturing pension schemes had changed considerably, requiring an increased focus on managing investments to provide an income that matched members’ pension benefits.
“Operating as our in-house investment manager, BAPIML has delivered excellent investment performance and stewardship of the schemes over many years,” said Roger Maynard, chair of trustee APS and NAPS trustee.
“This agreement is the necessary next step in the evolution of the schemes as they look to enhance their respective investment strategies, working toward their funding goals.”
According to the joint statement, BlackRock was selected following a competitive tender process, based on its “deep knowledge and commitment to the UK pensions industry, its scale and investment expertise and its market-leading risk management technology”.
Sarah Melvin, head of BlackRock’s UK business, said: “British Airways is an iconic global brand and a leader in its sector. We are honoured to be entrusted to manage the assets of these two important pension schemes through the creation of a bespoke model.”
It is not the first time a UK pension fund has outsourced its investment function, nor that BlackRock has benefitted. In 2017 Nestlé stripped its internal asset managers of a number of mandates, with BlackRock taking over management of several funds. Another precedent is National Grid disposing of its in-house manager Aerion several years ago.
Keira-Marie Ramnath, pensions asset management outsourcing lead at PwC, which worked with the trustees and others on the arrangement, said there was a trend among larger pension schemes that wanted to retain control of investment strategy and asset allocation while benefiting from the operational efficiencies of a single manager.
“The UK OCIO market has doubled in size in the last four years and it now commands assets of more than £200bn,” she said. “But there are £1.8trn defined benefit pension assets in the UK, and, given the benefits that can be achieved, we’re expecting to see the market continue to grow substantially.”
Bart Heenk, partner and UK country head at Avida International, told IPE the outsourcing agreement made sense, as the in-house skillset had not been fit for purpose. He estimated that BlackRock would be charging a flat fee of 5bp for managing the assets, plus possibly add-on fees for services such as ESG reporting.
Patrick Race, investment partner with pension and investment consultants Isio, said: “It’s a large mandate but it is not the first time a pension fund has outsourced its investment function. A number of the big consultants and investment managers operate an OCIO structure.”
Race continued: “As they become better funded, many pension funds are becoming more straightforward in investment terms with less need for equities, more need for cashflow and liability-driven investments. This means they will require a different set of skills than traditionally available in-house.”
But he added: “I’d be very surprised however if the BA Pensions trustees didn’t continue to use other external managers within the BlackRock arrangement. No manager is best-in-class for everything and OCIOs have to allow for that.”
Donny Hay, director at IC Select, told IPE BA Pensions’ outsourcing decision was not that surprising, and that it was an example of the consolidated model for investments that will be used by more DB schemes in the UK.
”I think it’ll be sooner than late 2024 that as many as half the DB schemes will have adopted that model, be it fiduciary management, sole trustee, master trusts, or super funds,” he said.
With additional reporting by Gail Moss
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