Investing smarter addressed at NAPF conference

Pension fund executives and their money managers must “invest smarter” if they are to ride out stubbornly low interest rates, increased longevity and other external factors, while continuing to deliver value to participants.

That was the overarching theme of the annual National Association of Pension Funds investment conference, held in Edinburgh, March 11 to 13.

“It's about the recognition that, in a low interest (rate) world, every pound lost in inefficiencies or excessive charges is a pound lost in return,” said Ruston Smith, chairman of the NAPF, in his opening speech to delegates. Mr. Smith is also group pensions director of Tesco PLC, Cheshunt, England, which has a £8.4 billion ($12.6 billion) pension fund.

Later in the conference, Mr. Smith cited the £21.1 billion Railways Pension Scheme, London, as a good example of a pension fund that “invests smart.”

Chris Hitchen, CEO of RPMI, which runs the pension fund, presented a case study of changes made to the management of its 110 different sections.

In 2013, the pension fund called on Roger Urwin, London-based global head of investment content at Towers Watson & Co., to oversee its “investment transformation project.” The pension fund had followed a multimanager, outsourced model until the financial crisis hit in 2008. There was “realization subsequent to that, that double-digit returns probably weren't coming back for a long time,” Mr. Hitchen said. “The outlook remains for essentially financial repression, low interest rates and low returns from assets in general. In that environment, you have to think fundamentally about the way you go about investing institutional money, and really make sure that you do it as effectively and efficiently as you can. And don't leave anything on the table.”

Mr. Hitchen said the pension fund's executives spent eight months formulating a plan for the future, with a “very, very long list of things to do — 400-and-odd things.” He said they are nearly through that list.

“We have been quite lucky that not too much has gone on out there … in investment terms. Central banks have continued to rig the markets and given us some breathing space to actually make the changes we needed to make. And actually that's probably very important in helping us to create an environment for future success.” Mr. Hitchen said.

As part of the transformation, Railways Pension Scheme executives focused on cost. “In a world of lower returns, you cannot afford to leave them on the table. We have probably been quite happy to pay relatively high fees in the past because we felt we were getting value for them. I think in a lower-return world, you have to think, 'Am I really getting value for those fees under every circumstance?'”he said.

Part of that review was to employ an executive in the firm's Darlington, England, office, “who we colloquially call the 'forensic cost accountant,'” Mr. Hitchen said. “We have worked out this is going to be a full-time job for the future, continually digging into where we are paying costs and what they are.”

He said the pension fund has always externally benchmarked its fees, but realized that, going forward, it needs to be “much more scientific and rigorous about what are we actually going to get from a relationship.” He said that includes seeking out “hidden betas — can we get access to those much more cheaply elsewhere, and then what's left over … is there enough to justify the relationship?”

Mr. Hitchen said fees disclosed by the pension fund in its accounts amount to about 35 basis points. “When we dug into what was being taken out of the assets … we found that the total amount being paid out was more like four times what we disclosed. That multiplier was even a surprise to me. We are now arguing that everyone should be much more transparent, and that way we can really put pressure on the industry as a whole” when it comes to fees by providers.

A renewed focus on cost also was announced by the NAPF, the trade body for U.K. occupational retirement plans. Mr. Smith said part of working out how to continue to deliver value to pension funds was to conduct research on the fees that pension funds pay for various investment strategies. He said the NAPF's research showed a range of 45 basis points to 90 basis points for active global equity portfolios, and from 32 basis points to 200 basis points for active real estate.

“When you think about it, how the difference in fees can compound over the years, we can perhaps create major rather than marginal gains,” Mr. Smith said.

The theme of “invest smart” extended to another keynote speaker at the conference. Emmanuel Roman, CEO at the $72.3 billion alternatives manager Man Group PLC, London, presented “10 things Janet Yellen forgot to tell you.”

Among those 10 points — which included the need for his native France to make serious structural reforms, and the “second industrial revolution” that is taking place in part due to the proliferation of innovative companies in Palo Alto, Calif. — Mr. Roman highlighted the fight between man and machine.

In a section titled “Machine 1: Human 0,” Mr. Roman said quant investment will be like the rise of passive investment. “We have a big quant business,” he said. “We will see more money managed by computers. It is cheaper, faster, and the client is better off.”

And Jimmy Wales, co-founder of Wikipedia, referred to the increased use of computers and social media as a way for the pension fund industry to tackle the subject of getting young people to save. “What young people share online is more than I would,” Mr. Wales said. “As that group of people matures and ages,” that could be used by the industry. “A problem for the pensions industry always has been (that) 25-year-olds are not thinking about retirement, (and it is) hard to get people to think about it. But as they get older they will be a very social generation.”

He said one potential solution would be to reinvigorate the U.S. investment clubs that he said were popular in the 1980s. “People got together once a month to talk about investment. That becomes really interesting, if the pension fund industry can foster a community around pensions and savings,” Mr. Wales said.