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Setting a standard on governance

The BT Pension Scheme (BTPS), winner of this year’s IPE Silver Award for Corporate Pension Fund of the year, is the largest defined benefit (DB) company pension scheme in the UK. The fund has an impressive 365,811 members in total, comprising 91,692 contributing members, 95,829 deferred pensioners and 178,290 pensioners. Clearly the managers of the scheme have considerable responsibility resting on their shoulders.
The size of the task did not escape this year’s IPE Awards judges: “A big private DB pension fund which has to manage a great business with increasing demands and challenges.”
But what impressed the judges was the manner in which the fund goes about its business. One judge praised the fund for its: “Clear investment processes and responsibility and corporate governance.”
To this end, the fund’s investment objective is consistently to meet its performance targets in a risk-controlled manner so that the scheme may, in the long run, meet all its liabilities. Assets are managed according to a quantitative risk budgetting methodology wherein the core is managed passively, thereby taking no benchmark risk allocation. The remaining assets are allocated to specialist investment strategies (private equity, real estate, emerging markets etc). There have been no major shifts in asset allocation over the past two years other than a gradual move in favour of bonds and real estate assets.

The scheme is overseen by a board of trustees (two company executives, four member-nominated, two independent and overseen by an independent chairman). The board meets monthly with agenda items for discussion proposed through the BTPS secretariat. The secretariat is a separate group, employed by the trustees and staffed by five professional pension staff.
Investment management is delegated to Hermes Investment Management, the wholly owned asset manager of BTPS, which manages the bulk of the funds on a core-satellite basis and outsources key areas as well.
The investment strategy appears to be working well, with one of the judges noting: “The five-year rolling investment return is in comparison to other pension funds relatively high.”
Education and communication with members comes via the BT Pensions internet website, staff intranet site, staff magazine (monthly), webcasts and meetings.
In terms of contributions, employees pay 6% and the employer pays whatever additional amount is required to meet the long-term cost of benefits. The current employer contribution rate is 12.2%.
Significantly, the scheme does not undertake asset liability matching. BTPS has a strong cash flow – £1.7bn in 2002 – and about 65% of the fund is invested in equities. Some 14% of current liabilities are in respect of contributing members.
However, it is in the area of corporate governance that the judges really felt that BTPS was ahead of its peers. “Obviously a leader in the field of corporate governance,” commented one judge.
Another felt that BTPS was an example to other European schemes on the issue of voting rights: “The shareholder activism of BTPS looks very sophisticated and BTPS is a pioneer on this issue which gives a positive input for other pension funds as shareholders.”

Certainly BTPS is at the forefront of best practice in corporate governance. As most of its large cap equities are indexed, the fund is an ‘owner’ of every stock in the index. Unlike an active manager, it cannot walk away from a troubled company. Because of this, it has decided to take its ownership responsibilities more seriously than many shareholders. Through Hermes, its manager, it has built up a staff of over 40 people involved in corporate governance and engagement. BTPS and Hermes believe that companies with intelligent and engaged shareholders tend to perform better. The end result of this is the creation and funding of the Hermes Focus Fund. These funds (UK large cap, UK small cap, European) target companies tht are fundamentally strong, but which are felt have a ‘corporate governance’ weakness associated with them. The Focus Funds seek to be a catalyst for change. Since seeding these funds (October 1998) BTPS’ return (to June 2003) has been just over 28% against the FTSE return of –5%.


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