Do good jockeys make good pension ministers?

The Talking Responsibly Podcast opened with Guy Opperman explaining what attracted him to racing horses.

“You’re dependent on the horse, so long as your horse is good enough, you can compete with the greatest jockeys in the world”

Substitute “horse” for “pensions” and “jockeys” for “ministers” and you can see  Guy Opperman’s  personal and political agenda align.

This blog is my commentary on some  very personal views from  Opperman as  he talks  to Adam Matthews  of the Church of England pension fund and and David Hickey of the Lothian pension fund. 

You can listen to the Minister for yourself , by clicking on the podcast at the top of this blog.

Who controls how pensions transition?

Guy Opperman

Hickey and Matthews cheekily asked who is in charge of regulating pension funds transition to net zero – was it the UN Secretary General as could be construed from his speech on the last Thursday of COP or was it the Government/Regulator/Trustees?

Opperman sees this as a  partnership between members, trustees , this Government and the governing bodies around the world. But he’s on a good horse

We are ahead of the world, TCFD is the clear next step for everybody. Our regulations for COP26, looking at what we’ve done for pensions, most countries recognized that we lead the way.

“If I had gone to an ESG convention when I started in 2017, three men and a dog (Zola?), would have turned up.”

It’s a “follow a money thing”, those countries and organizations that don’t sign up to net zero, will struggle to  get capital”.

Look at the way we are moving capital towards the solutions… We are going at pace.

It’s clear that though he considers he’s riding a good horse, Opperman is proud of his jockeyship, competing is one thing – winning another.

Do we need pension wealth funds?

In what appears a new initiative, Opperman is looking for heavyweight investment form Pension funds working  together. His argument is that schemes are individually very good, but individually are quite small and don’t have much clout.

The Minister gave as an example, the Church of England Pension Fund, which he said  would struggle to properly invest in infrastructure.  He suggested it  could instead create a kind of pension wealth fund that could provide the critical mass to “genuinely make a difference”.

Groups of investors, coming together to form investment pools is nothing new – it is what Local Government schemes have had to do rather than consolidate the schemes themselves.

Opperman’s previous argument was that the consolidation  was a DC scheme agenda. Here he was arguing that the collective investment could be done by investment pooling – which doesn’t need schemes to consolidate.

Perhaps mindful that he might be diluting  his scheme consolidation  agenda , Opperman stressed that  scheme consolidation  is better for members but this statement, taken from the podcast seemed to suggest that most corporate DB schemes need greater scale than they can achieve for themselves

“The arms-length infrastructure fund” is a scaled “pension wealth fund” – a  pooled fund in another form.  It allows you to collectively employ your own manager . You can do this for VC , creating the next green-tech unicorn. My question  for you is what would stop you doing this?

Most DB pension funds are in no position to do this because they are in the endgame and in the thrall of the pending DB funding code. They no longer have the opportunity to chase unicorns.

The Minister might be better talking to the likes of Clara and the Pension SuperFund, the PPF and the buy-out insurers as to how they can manage the long-tail of DB investment.

How can DB trustees positively influence the wider investment agenda?

Hickey and Matthews seemed a little flummoxed – as illiquid infrastructure and private equity funds do already exist (and are used by both the Church of England and the pool of which the Lothian pension fund is a part).

Their view was that  DB schemes could create demand for and seed

A pooled product that can be transferred from DC to DC in specie.

But with DB funds increasingly looking to participate in master trusts or even hand over all control to superfunds and insurance companies, scale may be being achieved for operational rather than investment reasons.

Matthews and Hickey were keen to move the argument on from the parochial interest of building back Britain to the argument that private markets need to be funded in emerging economies, if those economies are to achieve their climate goals.

Opperman seemed initially less happy for pension funds to invest in overseas ventures which he characterized as an  “international COP recovery fund”. I suspect that he is worrying that providing “overseas aid” is a different proposition from “commercially responsible avenues for investment”

The Minister concluded it was very hard for Government to lead, but possible for it to  facilitate by creating the structures. In creating changes in asset allocation @guyopperman says he has very little power but a lot of influence.

Is the role of trustees changing?

Opperman reckons the role of  trustees has changed radically in the last ten years.  This he saw as down to “nudge factors” – such as ESG, where members nudge for change. Here the argument had clear relevance to the membership of the Church of England Pension Scheme but limited application to the fiduciary duty that is central to the trustee’s role.

If we see the concept of fiduciary duty as immutable, then the role of  trustees can only change if member’s needs change. As has been said many times, the role of pension trustees is to ensure that member pensions get paid in full and this is not changing.

But the investment opportunities to make that happen are changing and Opperman argued that trustees should be happy to invest in potential unicorns overseas, fishing for the next Facebook or Berkshire Hathaway.

This led to an agreement to take things forward. Here’s Adam Matthews on linked in.

In response to this discussion it was great to agree to host a Roundtable in the New Year with interested pension funds with the Minister to roll up our sleeves and get to work.

Is Opperman’s passion for consolidation wilting?

Having stressed the need for investment pooling from unconsolidated schemes, Opperman moved back to his DC scheme agenda claiming

“you’d really struggle to find a scheme under £100m that would not be better off consolidating to a bigger fund. We’ve won that argument”

He added that DC schemes managing between £100m to £5bn is a work in process. He stressed again that his concern was not just about the cost of pensions.

We are now looking at value, the tPR/FCA consultation is being taken on by TPR. We’re focussing on what influences  “outcomes”. How do you value the investment you’ve made for the member you’ve made it for?, How do we measure this at  scheme and member level?

Opperman is now saying that we should be comparing pensions as we can compare schools and hospitals.

I work for the consumer. The man in the street has not a scooby-doo about how to understand industry metrics on value. League tables are coming, but how can we measure outcomes.

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Is reporting getting in the way of doing?

The Podcast asked  “what is the importance of doing this TCFD reporting if it gets in the way of implementing the transition?”

Opperman accepts there is a burden on trustees for doing complex reporting. But there is commercial advantage to UK industry of being leader. However he sees the next five years as a bump in the road on the journey to net zero

We are in for a bumpy road for trustees over the next five years as trustees have to do multiple reports for multiple reporting frameworks. But in five years, we will find a conglomerated metric that will simplify things.

To which Matthews and Hickey see the danger of a single metric (such as implied climate change), as driving disinvestment – but not much else. Ironically , this came across as better argument for complex reporting

If I was the pension minister, this is what I would be doing….

The Minister’s final words were a call for a new podcast for people who have ideas on how we can make things better.

Let’s hope he reads a few of the blogs published since he came to post in 2017.

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