Richard Stroud chief executive of the Pensions Trust(PT) is something of a pensions revolutionary in action. Not, of course, that he would ascribe to such an epithet, or wish to have it applied to him.
From PT’s modest offices just south of London Bridge he runs, the UK’s 46th largest fund – according to this year’s ‘Blue Book’- with assets of over £2bn (e3bn)and a membership all told of over 110,000. Since the trust provides the pension arrangements for those working in the charitable, voluntary and not-for-profit sector across the UK, it has to meet the demands of around 4,000 different employing organisations, from major national charities such as Save the Children Fund and Oxfam, to the smallest bodies comprising maybe just one or two people.
The pressure to provide for such a range of diverse groups, who know precisely what they want to do with every pound they have, may have been the stimulant to be highly innovative if not revolutionary. But his role is to come up with implementable solutions.
So take the question of governance within pension funds – a topic that is causing much ink to be spilt currently. A novel step was taken by the trust relating to its four-strong compliance department. Says Stroud: “While nominally head of compliance reports to me, he is not part of my executive management group though he has the same status. He can write his own independent report to the board and acts as the conscience of the organisation.”
The compliance head’s reporting lines include the chair of PT and the chair of the audit committee. “I cannot discipline him, change his conditions of employment, sack or dismiss him unless the board approves. So he can act pretty independently of me. He can whistle blow me and I cannot do anything about it!”
His job is to be as independent as possible – all complaints go through compliance department. “I believe such a structure could be used more widely in pension funds.”
Ask where such concept came from and he points to his head.
In the great debate in the UK about DB and DC, he devised what he refers to as “a third way” with the ‘career average revalued earnings’ (CARE) approach (see panel). “It is nothing new, but is the combination of contracts which have been around for years.” He adds: “It requires just a bit of imagination, coupled with unbiased thinking, or to put it more bluntly – people need to ‘think out of the box’ and think about real solutions which meet customers’ needs.”
He thinks it is crazy that in a world where more needs to be spent on pensions, DC solutions are being adopted which mean less ends up being contributed to members’ pensions pot. “Are we going backwards?” he asks.
The PT is a multi-employer arrangement under the UK’s pension structure, which is a comparatively rare bird, but the experience he has over his 25 years with the trust has convinced him of the benefit of adopting this approach more generally. Something the government has indicated that it would like to see.
As ever, the dead hand of tax law is blighting the growth of this particular shoot. “UK legislation only allows multi-employer schemes within a particular industry.” But as a council member of the National Association of Pension Funds, Stroud is chairing a working group that hopefully will see new legislation early next year allowing multi-employer arrangements to bloom.
“You could see the Hertford- or where ever - Chamber of Commerce setting up a multi-employer scheme for their locality, that all sorts of local businesses could join.” That certainly would be revolutionary in UK terms. “We think we are close to getting all the approvals needed for this.”
Currently, a project that Stroud has in hand is how to protect PT from the pensions’ longevity risk. The aim is to buy this protection from the insurance marketplace. His approach is to devise a system that will have a panel of competing insurers for the trust’s business. By pooling the business in this way he reckons significantly improved terms can be obtained from insurers.
The trust was innovative in its origins being formed in 1946 by the National Council for Social Services (now Voluntary Organisations), for qualified social workers who worked for charities, as they were not entitled to local authority superannuation. “In our first year assets came to £15,000, so it was small beginnings.” Then its remit was extended to cover all charity and voluntary organisations, he points out.
In 1962, the then Social Workers Pension Fund, as it was then called, was hived off into an independent unit from the national council, with the name Pensions Trust being adopted in 1987 to give a better picture of the trust’s activities.
Stroud points that when it started only money purchase schemes were run – he thinks it is incorrect to refer to these as defined contribution, as it is possible to provide targeted final salary schemes through these plans, though in most instances these are on a DC-basis. In addition there is the CARE scheme he describes as a hybrid, and DB plans, some for single employers and some for multi-employers.
“For example, we run the Social Housing Pension Scheme for 700 housing associations,” he points out. It is the individual groups that decide about the levels of benefit, type of plan and size of contributions. “We still have new groups coming to us for final salary DB plans.”
On the other hand, a number of organisations have closed their DB plans to new entrants. “They have advice from external consultants to do this, but I am not convinced that their advice has been that clever. The employers should have come to us to find out what the ramifications were. Some have set up stakeholder schemes, with small contribution rates, with the result few have joined them.” They are also finding that with the closed scheme, the average age is increasing faster than it would have, resulting in extra contributions to be paid to pre-fund that cost. Their so-called clever consultants hadn’t told them about that aspect!”
“All in all we probably have about 40 different schemes operating.” About 30% of the PT’s business is in DC, he reckons, with rest in DB, while the hybrid, CARE is still small. He adds: “We knew the CARE scheme would not take off like hot cakes. It is going for a year, with 500 members so far. I believe in three or four years it could have up to 4,000 members. It is very simple to join. If charity wants to enroll two people – it need only take five minutes! There is no documentation except for a simple application form.” For multi-employer schemes he believes that the CARE model could be the best.
An asset liability study has been carried out for the main products, as a result an new investment structure is being introduced next month. “Our clients are now more into asset mixes linked to their liabilities,” says Stroud. Some 45% of assets are passively managed, with Legal & General running passive funds for all asset classes. For the actively managed portion, Fidelity, Capital International and BGI are to run global equities, though Fidelity’s brief is limited to UK and European equities. “This global equity is split 50% UK, and 50% overseas.”
Morley will be used for a global bond and cash portfolio, while Standard Life will be running a specialist active corporate bond mandate. CBRE is to run the direct property portfolio.
“We have agreed with the managers that four basic investment groups are being set up: group one is 75% equities, 25% non equities; group two 65%, 35%; group three, 55%, 45%, and group four, 70%, 30%. The aim of this system is that if the client wants anything bespoke, we should be able to provide this.”
The results of the asset liability study, which was undertaken by Mercer, are being discussed with the different clients, who are free to obtain further analysis if they wish from the consultants as to which risk profile would suit them. But the PT’s trustees will be watching that the ultimate decision is appropriate in their fiduciary view for the particular liabilities of any individual group. “If people want more equities, it could cost them more not less in order to protect against possible market downside.”
“Ultimately, it will be possible to fine tune the allocations more, but we are confining the choice to these four to get the new system off the ground,” he says. “So in a few year’s time, if someone wanted to be 100% bonds, that should be possible.”
The trust will be measuring and monitoring the performance both of these managers. The four asset groups will be on a unitised basis run by the fund’s custodian Northern Trust, which will calculate NAVs and performance. Says Stroud: “The managers have been selected not just on their quality, but because they are complementary to each other. Their outperformance targets are not excessive, but are attractive and reasonably stretching.”
The funds want consistent outperformance, but not “huge outperformance at huge risks”, he adds. “They all have tracking error ranges agreed, which have to be reported to our investment committee. When these are merged into the investment pots, the risk becomes pretty low. So, if a manager under performs, we change them.”
The fixed weight benchmarks approach does overcome the asset allocation decision. A rebalancing system run by L&G is being put in place. In addition, around 50% of the overseas equities will be partially hedged.
The management costs are working out at only at 21bps, he points out. “In the fund of funds market you are looking at 80-100bps in charges. Someone is making a huge amount of money!”
One word of advice he has for pension funds is to sort out fees with potential managers at the time when they are pitching for the business. “Once you choose a manager, it is hard then to argue about reducing fees.” Consultants so rarely look at the fees side, he says. Another tip he passes on is to ask their existing managers to lower their fees on the new money coming into when their asset base has increased.
PT’s managers present to the investment committees every six months. “Since we manage that process, we have a detailed agenda – so they work to our agenda rather than making a set presentation. This covers issues, such as voting, corporate governance.” Some of the clients - such as Oxfam and Christian Aid - use a SRI fund tracking the FTSE4Good, which is available to others.
The real estate portfolio is targeted to reach £150m, or 7.5% of the portfolio, up from 4-6%, all in directly held properties, managed by CBRE. “We look on property as a funny sort of bond, providing income and income growth, but not too worried about capital values.” The aim is returns of RPI plus 6 percentage points in absolute returns.
While hedge funds and private equity have been examined regularly, Stroud confesses a reluctance to become involved because of the high levels of charges. “We want to keep costs to around 20bps as a matter of policy. These firms don’t guarantee their high returns, but they do guarantee huge fees! Even if we put just 5% into private equity, it would completely blow investment costs. If our members see these costs doubling they will object.”
All in all PT has over 160 staff throughout the three locations. Administration is handled in-house. Stroud has a problem he says with outsourcing: “My golden rule is do not put your customers in the hands of third parties. If we have a complaint and it is our mistake, we’ll own up.”
In fact, he says the aim is to be proactively promoting the explicit set of values the trust has adopted and a lot of effort is put into inculcating staff with these. “Our offices in Leeds and Edinburgh are not called ‘Verity House’ without reason.”
The transparency, Stroud believes is vital to running a fund, comes through the annual report to members – last year’s was put on to an audio CD for the unsighted or if people want an A3 size printed version that can be supplied as well.
A review of scheme actuaries was undertaken, with the unusual result of the incumbent Watson Wyatt being replaced by HSBC Actuaries. Stroud reckons that the fund will save considerably as result. “I think it’s time that more funds put their actuaries through such a review process. I think actuarial fees are hitting excessive levels.” The auditors and lawyers are similarly reviewed regularly.
PT is run by a board of elected trustees – half from employers and half from members. “I am employed by them as administrator and report to them by comprehensive management reports.” There is a separate remuneration and appointments committee for pay and strategy.
Do participants within multi-employer schemes lose of the any control that they would have if they ran their own scheme? Stroud’s response: “I believe Robert Maxwell had a lot of control over his group scheme.”