Identifying ways to increase domestic investment and consolidating local government pension schemes were the two dominant themes at this year’s Pensions and Lifetime Savings Association investment conference in Edinburgh.
Torsten Bell, U.K. minister for pensions, identified the estimated £160 billion ($207 billion) sitting in surplus in the nation’s defined benefit plans as having the potential for redistribution in corporate investment, or being shifted to a company’s defined contribution plan.
“Surplus flexibilities will allow more well-funded DB plans to release resources back to businesses and pension plan members where it is safe to do so, and where trustees agree they are best placed to determine, in consultation with employers, the appropriate use of any surplus in their plan,” Bell said in the opening session.
Bell’s comments echo statements made by U.K. Chancellor of the Exchequer Rachel Reeves in January, where she expressed a desire to amend current rules where a pension fund must have passed a resolution before 2016 in order to access a pension surplus.
Reacting to Bell’s comments at the PLSA event, Jos Vermeulen, head of solution design at asset management firm Insight Investment, was broadly supportive of the proposal but emphasized the need to get policy on the issue right.
"The protection offered by the Pension Protection Fund to cover all benefits is needed to reassure both trustees and scheme members that retirement income will be paid in full, even if surplus is released," said Vermeulen.
At the event, Bell also touched on plans to further consolidate and merge the U.K.’s LGPS plans.
Since 2015, the U.K.’s 86 administering pension fund authorities have moved to consolidate management of their investments through eight LGPS asset pools. As of March 31, 45% of LGPS assets, amounting to £178 billion, was invested through these pools.
“I'm going to have the calls in the coming weeks (with LGPS plans), and having that conversation (about consolidation),” said Bell.
“I'm very pragmatic about how we do this. So I totally recognize the questions around innovation and competition that people raise with me on this. The final pensions report will engage directly with those questions, and will do so while also setting out the trajectory. The status quo is not OK,” he continued.
Maple 8
The move for U.K consolidation in DB funds is also something that Reeves has explored since beginning in the role last year.
Speaking at a PLSA session, Sebastien Betermier, executive director at the International Centre For Pension Management, talked of perceived benefits to the Canadian model.
“(The Maple 8) has strong governance and an ability to act as long-term investors. There's no solvency regulation driving the funds, they actually have the ability to take risk if they want to. They have the ability to, in some cases, have a total focus, where the team actually is responsible for the the whole asset allocation, and then the alpha keeps coming along with it,” he said.
However, some Canadian investments have gone awry, such as in U.K. utilities firm Thames Water. In May, the C$138.2 billion ($96.6 billion) Ontario Municipal Employees' Retirement System, Toronto, announced it would undertake a “full write-down” of its 31.7% stake in the scandal-hit company. The U.K.'s £78 billion Universities Superannuation Scheme, London, also wrote off the value of its share in the company.
Max Townshend, head of investment strategy at the £20 billion Local Pensions Partnership, London, said: “You don't copy everything. There are big picture things around governance and the investment trade that the U.K. sector can take inspiration from, but there can still be provision for a model that is able to continue to pursue local investment.”
Also at the conference, Duncan Johnson spoke of the Northern Gritstone enterprise of which he is chief executive. The fund takes a localized approach to investing, focusing on venture capital poured into startups based out of research universities in the northern English towns of Leeds, Manchester and Sheffield. A core investor is the £60 billion Northern LGPS, and Johnson believes that Northern Gritstone would not exist in its current form if LGPS consolidation had occurred earlier, creating a core group of funds similar to Maple 8, and Northern LGPS ceased to exist.
“(With pooling,) that local connectivity, that local angle, a quality people like — that can be lost,” said Johnson.
Extinction Rebellion
Protesting outside the PLSA event were environmental activists Extinction Rebellion, which gave out flyers to attendees claiming that U.K. pension funds were failing to conduct robust climate risk assessments.
Responding to this claim during a panel discussion, Leandros Kalisperas, chief investment officer at the British Business Bank and until this year CIO at the £18 billion West Yorkshire Pension Fund, Bradford, England, said: “The question is, what's better? What can you do better than what's being applied currently?
“So we know that there is some approaches that have been suggested by others, but it's also not clear how easy that is to put into practice. So I would say that calling out the fact that current literature may not be credible is fair. I have sympathy, but the question then is actually about practical solutions,” he said.
At an event on “extreme engagement,” speaking were Alex Younger, head of funding and investment at the £5 billion Norfolk Pension Fund, Norwich, England, and Mark Solomon, a lawyer at Robbins Geller Rudman & Dowd, who represented the fund.
They detailed how they had taken on corporate megalith Apple, winning a £385 million settlement over allegations that the tech firm made public statements misleading to investors.
“Apple threw the kitchen sink and everything else they could into their defense, and it took five years of hard-fought litigation to ultimately get to a resolution,” said Solomon.
