Interview – Royal Mail Pension Plan


its fund without a terminal bonus, but it remains underwritten by the sponsor and not left to its own devices.


It is ambitious in what it is trying to achieve, so we have to be smart about it. Given that it only has between 10% to 15% of equity exposure, it needs other assets to provide returns, too. So, we went into the year overweight cash and hedge funds. When everything sold off, we had lots of dry powder to invest in cheap high-yield- ing assets, equities and other opportunis- tic investments, reducing the cash as we did so and benefitting from the subse- quent rallies in markets. It was nice tim- ing with hindsight; we could not have been much better positioned for what ultimately happened.


I remember writing my annual review to my trustees saying that we were expecting a tank in 2020, perhaps around the US election. But then, of course, the pandemic came and we were already [inadvertently] positioned for it. It was a good call that markets were looking for a short-term correction, but you are only as good as the next call.


In the old section we hold a lot of private debt, private equity and real estate. The portfolio is broadly diversified by vintage and asset type. It was impossible to re-cre- ate this “Rolls Royce” alternatives portfo- lio in the new section at that scale because it had no assets when it was first launched. What we did do was to unitise the old book of DB assets – which we coincidentally wanted to sell as part of our de-risking, set up a fair pricing mechanism and re-allo- cated assets into the new section. So, the new section gets the great benefit of the economies of scale that we have and the established vintage diversity of a more ma- ture private markets programme.


So, this offers the new DBCBS section ac- cess to a broader spectrum of assets than a DC scheme? Yes, and it is not just limited to illiquids. Equities and debt are pooled, too. This is especially


helpful for property invest-


ments. In the old section, we owned buildings directly. It started off with the Post Office section where we bought di- rect real estate funds.


If we were a typical UK pension scheme with one of the main asset consultants, we would have been guided into a pooled fund, which is the worst way of accessing property in my view. We use consultants under an “open architecture” model. For property, you want to either own it your- self or have a private markets fund which self-liquidates. So, for the DBCBS section, we unitised the funds we wanted so that the new section’s property allocation is well diversified from its first investment. It could not in all reality have practically done that independently.


And the composition of the new section’s portfolio looks different from your old Roy- al Mail section. It must have been like starting with a clean slate. That’s right, it has different objectives – as mentioned earlier it has a higher return target than the old closed section. For the first few months, we invested in proxies. I just bought some lower risk diversified funds, but, as the money came in, we bought things that we thought were cheap and attractive. Now it is a robust portfolio and I am happy with where it is. We still have lots of dry powder coming in and have invested swiftly in some interesting new ideas as a result of the market dislo- cations caused by Coronavirus.


You also do not have a charge cap? There is no charge cap for the Royal Mail or DBCBS sections, although the average fees for both are low [not least for the largely de-risked Royal Mail section]. I am hoping that the company, the union and their advisers successfully lobby govern- ment to enable structures which accom- modate performance fees and a more re- alistic charge cap for


their new CDC


scheme, which would enable better access to the opportunities presented by the pri- vate markets, especially for a brand new,


22 | portfolio institutional December–January 2021 | issue 99


open and long-term investor – as CDC would be.


Porting over assets from a DB scheme to a less mature scheme could make sense for a lot of DB schemes. Are any other final salary schemes planning to establish something similar? I am not aware of any, but it would make sense. Our pool has an open architecture fiduciary approach. We are in-house, we are not a fiduciary manager in legal terms, but we piece together the advice to sup- port it. This is bespoke to us. You cannot get that set-up anywhere else.


We should all take on a job as a postie then? You are right. They have a remarkable pension plan, they might not know how good it is until they retire but good luck to them. We’re doing our best for our postal workers.


As sponsor, Royal Mail is unique in the UK pensions industry in being the only busi- ness to attempt the transition to a CDC structure. What led to such a move? In 2018, against a background of histori- cally low interest rates, it became clear that the Royal Mail’s defined benefit pen- sion scheme would be unaffordable for the business to continue to support in its current form and so was closed to further accrual.


CDC, of course, was not legislated for in 2018. So, Royal Mail, supported by the Communication Workers’ Union, lobbied the government to initiate legislation to allow for such a scheme, which proved successful. The legislation necessary to al- low CDC schemes to be set up in the UK has now reached the final stages of its journey through Parliament, and we ex- pect it to be on the statute book in the near future. While Royal Mail waited for this legisla- tion it set up a new section of the Royal Mail Pension Plan. This took the form of a defined benefit cash balance scheme


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