IGG’s Andrew Bradshaw
When in 2010 Stephen Ross and Andrew Bradshaw peeled away from HR Trustees and formed Ross Trustees , few gave the new entity much thought.
Now the re-badged IGG is a force in the land and with the backing of capital from Lloyds Bank, they are pre-eminent as professional trustees and the burgeoning professional services that support pension trust.
Yesterday saw the publication of two visions for how the Mansion House reforms could be delivered. I will come to the PLSA’s tomorrow and focus on IGG’s today.
In 11 pages, the submission is the most coherent response to the DWP’s call for evidence on options for DB schemes. It deserves to be well read and often read.
IGG is not a trophy trustee in the way that Law Debenture is. It is the professional trustee for the mid market. The average assets under management for its schemes is around £750m, as ITS and Ross Trustees (which merged in 2023) it struggled against Capital Cranfield, now – with the capital from Lloyds and merged forces, it sounds like the authentic voice of the occupational pension industry (something that the PLSA should beware of).
So what of the document – what does it say and why?
The central statement is bold , IGG does not accept the premise that the pension system is broken. It does not need general consolidation so much as better tending.
Achieving the proposed reforms set out in the Mansion House speech is not dependent on further consolidation in the DB universe, either in the superfund space or by means of the PPF. IGG believe it would be better for Government to focus its efforts on addressing the two main barriers to increased investment in
productive assets in the UK: incentive and risk.
IGG sees the private sector as currently structured as able to provide sufficient efficiency of scale to do so, and it expects to see more innovation so that it does so. This might sound like IGG talking its own book (it has grown through consolidation) but it has a track record of delivering innovation, not least in adopting a commercial ethos to its operations.
Making pensions work as hard as those who save into them,
In more detail, IGG argue that reform of surplus rules could give way to
greater investment in productive assets. This is an example of the commercialism mentioned above. Trustees that think for the sponsor and of pension schemes as a means of increasing their productivity are in sharp contrast to the image of trustees as pariahs to corporate strategy only a few years ago. A government that incentivised trustees to behave in this way – is preferred to a Government that exerted control through arms length bodies (such as the PPF).
It still sounds odd to hear Professional Trustees calling for “risk-off” but as well as incentivisation to invest more productively, here are trustees calling for regulators to encourage risk-taking. If trustees are leaving the quietest graveyard, shouldn’t TPR too?
So far so good, but I don’t agree with IGG’s proposals that the PPF guarantees 100% of the benefits of a scheme in the event of sponsor failure. This is like offering a down elevator rather than a safety net. If there does not remain jeopardy in risk-taking, the management of risk becomes sloppy and moral hazard enters the equation.
What is needed from trustees is leadership , IGG got big by being a start-up that took risks. So it is odd to read
Pension schemes should be offered an underlying guarantee because without it, and given the high failure rate of start-ups, many are likely to anticipate losing money and will therefore not to want to take the risk.
That a pension scheme enters into an equity investment without knowing it is possible to lose money would be sensationally silly, that it refuses to invest in something where it is likely to lose money may not be silly. If a portfolio of investments (say in VC) is likely to make a lot of money, should trustees be worried they will be investing in failure? I think IGG are arguing against their own instincts. The trustees should invest to the maximum of their risk appetite, the higher their risk appetite the more they will invest. Guaranteeing success from failure is not a way to increase risk-appetite , it is a way to transfer risk onto someone else.
Long term assets (and liabilities)
Rather than provide a down escalator to accommodate failure, Government would be better following IGG’s approach to the valuation of long-term assets.
To realise the potential benefits of DB scheme investment in productive assets,
IGG recommend the Government reconsider the valuation basis and move away
from the sole reliance on mark-to-market valuations. This method encourages a
short-term perspective, leading to conservative asset allocations. By introducing
alternative valuation methods that balance short-term fluctuations with long-term
objectives, trustees might be more willing to invest in higher-yielding productive
assets.
Hear hear to that, clearly there will be failures (Thames Water) but most long term investments aren’t written off because of early day failures, a long term view of value is preferable to relying on a market price- the deep discounts on the share price of listed investment companies shows how the underlying value of an illiquid asset can be depressed by short-term considerations (expense disclosure being the present problem).
A change in the valuation formula for illiquid assets is long overdue – some would extend this argument to the valuation of pension liabilities!
Consolidation of the weak
The submission ends with a technical discussion of how weakly sponsored and poorly funded schemes get ensnared in the PPF assessment after being labelled “PPF +”.
Here there is need for consolidation but in the short-term, straightforward help to both the cost-constrained trustee and the beleaguered sponsor. Capital backing through co-sponsorship leading to single sponsorship by a superfund looks the obvious direction of travel for a pragmatic Government.
It is helpful to understand the technical problems trustees face. As with so much of this excellent submission the section on PPF+ is authoritative, interesting and thought provoking.
