Interview | Morten Nilsson
At BTPS we have 300,000 members. We pay £2.5bn in pensions and benefits every year to the 200.000 retired members, so quite a lot of people are relying on us as either their sole or main source of income. That is something to be quite proud of and also a very big responsibility.
There is a kind of feeling of a higher pur- pose that you get when working here, something that you don’t get when you work for an asset manager or investment bank. We did a survey internally when I joined to find out what motivates people and this scored high on peoples’ reason for being here. We are doing something quite important for society and our members. The DC world is in many ways still in its infancy. Although we have started to enrol quite a lot of people, the average pot sizes of assets are still quite small compared to the DB world. Of course, it is growing quickly and at some point it will take over. From a political standpoint there is so much focus on that side of it, for example discussing infrastructure investment, and less focus on DB, which is still where all the money is.
In terms of investment strategy, DB schemes are obviously a lot easier to pin down than DC schemes, where things tend to be less centralised.
It is quite interesting how much airtime master trusts and DC players have and how little attention is being paid to DB strate- gies. Practically all DB schemes have a sponsor relationship so the dynamic is quite different. There is an opportunity there for DB schemes to engage more pro- actively from a pension policy perspective, on how things could be done differently.
Coming to investment strategy more broadly, BTPS closed for further accrual last year and the trustee now aims to reduce investment risk gradually. How is that reflected in your asset allocation? We have been reducing our exposure to growth assets for some time and are plan- ning to do that over the next 10 or so years. We have been hedging our interest and inflation risk and also hedged currencies to some extent, not fully but we have the capa-
bility to use the fall in the pound to our advantage. We can hedge all our exposures, which means we can for example hold more equi- ty risk than we ordinarily would because we have the downside protection. So we are pleased with having the in-house LDI team for active management and can work across all risk factors in a cost efficient and flexible way. That has reduced our overall invest- ment risk. We are moving towards a more cash-flow aware portfolio where we are looking for assets that match our cash- flows, our pension payments. We have been building those assets by investing in bonds, corporate bonds, real estate and infrastructure, many of which we plan to hold until maturity. That creates a slightly different risk profile than if we were to sell them. We are still on that journey of having a more cash-flow aware portfolio.
With so many bonds trading at negative rates, aren’t there pitfalls in holding them until maturity?
The big thing for us with negative interest rates is the impact on pension liabilities. During the past few months we have seen falls in interest rates and we have held up
Yes, we see our real estate investment as part of our cash-flow matching strategy. The focus is on the long-term nature of some of these real estate investments and how resilient they are to the four key long- term risk factors to our portfolios: climate change, scarce resources, demographic changes and technological disruption. So, especially with real estate where we plan to hold assets long-term, we have to assess these risks carefully. We try to run these four risks through our portfolios to see how exposed we are to these risks, for example if global tempera- tures rise what happens to our portfolio. That gives us an ability to test what would happen to our portfolios in certain scenarios. That is one way of helping to find opportunities and determine outcomes.
One of our big real estate investments is the development around Kings Cross and I am really proud of that. It used to be a run- down area and the investment has been part of an urban renewal project, where we regenerated the whole area. We created jobs and homes, there are even solar panels on some of the properties, so it’s been wonderful to contribute to that
One thing we should be proud of is
that we have done nothing to promote ourselves as responsible investors other than doing what we think is right.
pretty
well, but we are not a hundred percent hedged which means it does impact us. The main challenge for us is interest rates risk. We are less nervous on the impact on cash-flows than on the impact of liabilities, but you can say that the overall long-term expectation will have an impact.
You do have a relatively high allocation to property - 10% according to your last annual report. Is that also an attempt to match cash-flows?
20 | portfolio institutional | October 2019 | issue 87
and there have been some strong returns from the investment
Our property investments are now at 8%, we have reduced them slightly. There is the challenge to source the right investments, given the stage of the cycle. For example, retail has been exposed to technological trends. But the problems of high street retailers are creating opportunities in logis- tics and warehouses.
What ESG factors would you consider when investing in property?
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