How We Run Our Money: CEPB
Pierre Jameson , pictured, CIO of the Church of England Pensions Board, talks to Carlo Svaluto Moreolo about the fund’s active and global investment strategy
The Church of England (CoE) is many things at once. It is a 500-year-old Christian institution, founded by Henry VIII, with 25m followers and a state church headed by the British monarch. It is also a well-known and transparent institutional investor with a significant real estate portfolio, a large employer and a pension fund sponsor.
The Church Commissioners, with a £7.9bn (€8.9bn) fund that returned 17.1% in 2016, is the body that manages the endowment assets of the CoE. The pension funds for CoE clergy and staff are managed by a separate trustee body, the Church of England Pensions Board (CEPB). It is a unique investor of retirement savings, and not just because of its sponsor. Its blend of active, global management and a strong environmental, social and governance (ESG) focus make it one of the most prominent investors in the country and beyond.
CEPB manages three pension schemes. The first of the three, representing around 85% of assets, provides defined benefit pensions to CoE clergy. Pierre Jameson, CIO of CEPB, says the Church has a strong desire to keep the scheme open, in contrast to most other UK DB scheme sponsors.
The clergy scheme covers liabilities from 1998, while previous liabilities and pensions sit with the Church Commissioners. It will be about 10 years before the scheme reaches cash-flow neutrality, according to Jameson. That is a position most DB pension schemes would like to find themselves in.
The scheme is 90% funded and the board has chosen to hedge only 30% of inflation and interest rate risk. Jameson says: “That is quite a low hedge and reflects the immaturity of the scheme. Nonetheless, we have by no means turned our back on liability-driven investment.” The scheme has an LDI account, managed by BlackRock, which holds Gilts, plus a small amount of Gilt repos.
The scheme had a major overhaul of its liability matching assets in May 2016, when it sold a large portion of its index-linked Gilt portfolio after recording strong returns. The proceeds were used to buy two very-long-dated index-linked Gilts as a further hedge against inflation and interest-rate risk.
In addition to the LDI portfolio, the scheme also has a portfolio of high-quality corporate bonds managed by Insight Investments. The two portfolios constitute the scheme’s liability matching pool, which accounts for less than 20% of overall assets.
Around 80% of scheme assets are held for return-seeking purposes. The overall strategy is to continue the de-risking of the scheme’s investments, and by 2030 the Board wants to achieve a 70/30 split between liability-matching assets and return-seeking assets.
“We have a strong notion of where we want to end up, in terms of our 10-year asset allocation target, which is aligned with the trajectory of cash flows within the clergy scheme. However, we are not prescriptive on how we reach that target. That does not make our approach opportunistic, but we try to stay flexible. We will take advantage of asset classes that appear particularly interesting,” says Jameson.
At the moment, about two-thirds of the return-seeking assets are invested in equities, which the Board aims to reduce to 40% in 10 years’ time. Jameson continues: “We still very much want to be invested in equities, for a whole range of reasons, but reducing the allocation to equities will be a key aspect of our journey. At the same time, we will look to increase our allocation to fixed-income assets, including private loans.”
Jameson has already led the fund through a radical transformation. He joined 10 years ago when the CIO role was created, and the fund had around £800m of assets. His background has been mainly in equity fund management in the charity sector.
During his tenure, the fund has achieved greater diversification, removed a home bias in equity allocation, and enlarged the roster of managers from five to more than 25. When he joined, 95% of growth assets consisted of equities, plus a small allocation to UK commercial property. The new asset classes acquired during his mandate include global real estate, infrastructure, private debt, hedge funds, corporate bonds, emerging market debt, emerging market equities, small-cap equities and defensive equities.
Jameson anticipates further diversification for the fund, and says it will consider adding asset classes such as private equity, venture capital, real estate debt and infrastructure debt. At the moment, it is focusing heavily on infrastructure equity.
He says: “It’s a very good asset class because it fits the liquidity profile of the main scheme. In principle, we like the illiquidity premium and stable returns that it provides. We expect to earn 15% per annum from our infrastructure funds over time, half of that coming from income. The valuations can fluctuate, but not nearly as much as they do in public equity. The mark-to-market element is limited. We have gone for long-term, global funds that try to add value to the assets they hold. They have something of a private equity flavour.”
The fund, says Jameson, has a 20% allocation target to the asset class, 5% of which has already been drawn and invested. It will take time to fill the gap, due to the long waiting times for funds to invest commitments.
While they have the capacity to commit to infrastructure, many UK DB schemes are reluctant to increase their allocation. “I think it could well be a liquidity issue, as the typical DB scheme needs to have an 80% inflation hedge. But maybe there is also a residual desire to build the allocation around equities, despite the volatility of equities being distinctly unhelpful,” says Jameson.
The fund’s preference for global infrastructure funds reflects an approach that cuts across its whole portfolio. Jameson says the reason for this global approach is better risk management. The wider your opportunity set, the better your returns should be. We have removed what used to be a very large exposure to the UK equity markets.”
While this might not be an atypical stance, the scheme stands out in other ways. Jameson points to the fund’s belief in active management: “Overall, we certainly think that active management adds value over time. That’s been our experience.”
For that reason, the fees charged by active managers are worth paying, according to the CIO. “We are conscious of fee levels and we seek the best deals we can, but it is not a primary driver in manager selection. Some asset classes are more expensive to have managed than others. Very occasionally, you have to pay more for a strong manager.”
The fund’s strategy implies the backing of a strong governance structure. Indeed, Jameson says the CEPB has managed to attract a number of competent people to its trustee board. This makes his job more exciting, as well as efficient, and gives the organisation room to innovate. He says: “We are blessed with a very-high-quality trustee board, made up of market practitioners who have a wealth of experience and knowledge we draw on. Some come from within Church services, and those who don’t, find an organisation they feel affinity for. They feel like they can help. I think the quality of our board is something that makes us quite different from other schemes.”
However, the board worries about the usual issues. “Inflation, interest rates, high valuations in most asset classes are challenges we all face. Brexit perhaps is less of a concern, as we don’t have a large amount exposed to the UK economy. But generally, we believe we have a strong sponsor covenant that will help us through times of stress,” says Jameson. This is not something UK pension scheme trustee boards can take for granted these days.
The CEPB is managed with what seems to be a thoroughly rational approach. But it would be odd if, being part of a faith-based organisation, faith did not not affect its investment strategy in some way. Indeed, ethical investment is among the fund’s priorities. Jameson says: “We do our absolute best to reflect the values of the Church through the management of pension scheme assets.”
The fund’s approach is evolving, especially in its approach to ethical investment. It has policies in place to guide the fund on avoiding obviously difficult industries such as gambling, tobacco, alcohol production, pornography and armaments. But the fund aims to go further. Jameson says: “We are now developing principles and try to apply them across broader industries. A very good example of this is our policy on extractive industries, which cuts across the principles underlying a number of our other policies. This gives great grounds for our engagement team to work with the companies that work in that industry.”
“We have a strong notion of where we want to end up, in terms of our 10-year asset allocation target… However, we are not prescriptive of how we reach that target. That does not make our approach opportunistic, but we try to stay flexible. We will take advantage of asset classes that appear particularly interesting”
He points out that the scheme’s ethical work has moved from being purely based on restrictions, to a policy that focuses on better engagement with companies. “We are trying to make the most of our ownership and properly exercising our stewardship responsibility. We strongly believe that by being invested in a company we can influence how it is managed and how it interacts with society, much better than if we are not invested.”
The CEBP and the Church Commissioners have a joint in-house engagement team. The team, led by head of engagement Adam Matthews, has fought many battles in the past few years.
One such battle was won in December last year, when ExxonMobil announced it would implement a shareholder resolution on climate change disclosure. The resolution was co-filed in May 2016 by the Church Commissioners and approved by ExxonMobil shareholders, despite the company’s board opposing it.
In January 2017, the Church Commissioners and the CEPB, along with the UK’s Environment Agency Pension Fund , launched the Transition Pathway Initiative (TPI), an online tool that tracks how companies are dealing with climate change using publicly available information. The TPI has been backed by over 25 global asset owners and managers including Swedish AP funds, Denmark’s PKA, Calpers and Hermes Investment Management representing more than €5trn of assets.
Jameson admits that the pension fund industry is only at the early stages of mainstream adoption of ESG policies, but the CEPB and its partners are leading voices in a growing movement.
He says: “Overall we are quite a small fund, but we have a big voice, specifically when we combine with the Church Commissioners and other organisations. We can get the attention of senior management of large firms, and they do listen. We have had many engagement successes, some of which we don’t talk about. They have led us to think that engagement does work, particularly on climate change. Remaining invested is often the best approach.”