The Railways Pension Scheme has spent the past 18 months reviewing its investment decision-making processes. Chief executive Chris Hitchen tells Sebastian Cheek about the resulting changes.
Why was the investment review necessary?We came to a realisation that to keep our scheme relevant and focused on our stakeholders and members we had to ensure it delivered good long-term returns. The scheme is defined benefit with new entrants coming in, but it is shared cost in nature so the member contribution rate varies along with the employer contribution rate. To keep the scheme relevant and affordable we have to have a cost of funding which the members can afford, not just the employers. The whole institutional industry got used to double-digit returns over the 1980s and 1990s, but over the course of the
2000s we realised the ‘new normal’ meant that returns were harder to come by. This led to a raft of governance and organisational changes, how we partnered with external parties and how we put our portfolios together.
What has changed at the fund as a result?We have recognised we can’t leave any returns on the table if there isn’t as much to go for so we have to achieve returns from a number of different sources. One of those sources is what the market gives you: conventional equity risk premium and beta; but it is also about being smarter than that. We shy away from the term ‘smart beta’ but we do talk about alternative risk premia and trying to find the most efficient way of accessing them. We also recognise there are times when we need to be nimble and willing to take advantage of market opportunities and that requires us to have a new governance structure. As a result, we refreshed our investment beliefs and got those to a state where the trustees were happy with them and then we actually disbanded the investment committee, which was quite a change for the trustees to agree to. In its place they empowered a professional investment board, the Railpen Investments Board, to run the assets for them. The board is a subsidiary of the trustee but it has complete authority over the assets. We have staffed that board up with a number of professional non-executive directors who see their job as helping us get on with the job, guiding us, suggesting ideas for improvement and holding us to account.
What role do the trustees now play in this set-up?The trustee has an Integrated Funding Committee which deals with the higher level issues, such as the level of prudence each employer section needs, how much support is needed for the employer covenant and what the asset strategy should be at a high level in terms of how much in growth assets and how much illiquidity they can bear. Everything at a more detailed level goes down to the Railpen Investments Board and down to the team that manages the assets.
How has this affected your in-house/outsourced management balance?
We have had some 25 years of ever-more complex external manager arrangements, trying to seek ever-more exotic forms of alpha. Frankly we had a lot of expensive managers because in a world where there was an expectation of double-digit returns it was less important to control costs. We have always prided ourselves on doing better deals with managers than others can, but if you shave 5% off a big price it is still a big price. So we have gone back to basics and parted company with a lot of our external arrangements. It’s not that we don’t believe there aren’t talented people out there; we do, but we had to be satisfied that the scheme gets a big enough share of the added value. If fees are too high then effectively the manager keeps the excess return and the scheme doesn’t get any of it. So we have to have fair contracts and we are working very hard to ensure we have those fair contracts with as many of our counterparties as we can.
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