Rachel Neill | Interview


How are you monitoring LGIM’s levels of engagement as it is the shareholder so you are not voting at AGMs?


LGIM has a corporate governance team which is independent from the fund man- agement side of the business. So, if LGIM is invested in a company and there is an AGM coming up it will look at things like that company’s climate pledge and its envi- ronmental impact. That is irrespective of the performance of the company in the fund, which is important.


That is something we are keen to under- stand. We want to know where they voted and how they voted. Obviously, spending time with them when they do the Future World fund methodology, understanding how they approach ESG integration in pas- sive funds, how transparent the underlying companies have been and how they go about enforcing that is crucial. We now also have the legislation to back that up. So, master trusts must include ESG criteria in their Statement of Invest- ment Principles. That came into force last October and by October 2020 schemes have to show how they have implemented those standards.


But the rules are different for DC funds, right? Correct. You have to show how you have implemented your responsible investment policy and there will be further reporting requirements on trustees’ voting behaviour. In our case, we will have to demonstrate how often we have chased up LGIM and how often they have sent us reporting and monitoring. That means the onus is on us, not them to ensure we are being good stew- ards of member assets. We had lots of deep dives with LGIM and sat with the quant teams and the corporate governance teams, but the proof will be in the pudding next year. It will be up to us to demonstrate that we are practising what we say we are doing.


Was it a big job getting your Statement of Investment Principles updated ahead of the October deadline? We were lucky because our trustees saw


ESG as financially material a lot sooner than they were forced to by the authorities. By the time the regulation had been signed into law in September, our existing policies would have been enough to comply with the regulations. But it did give us pause to think about if what we were doing was enough? Can we be more intentional? Because of that we refreshed it. We were not in a rush because the structure was already in place. We want to be leaders in this area so we had to think about what more could we do. How could we be more articulate? From a mem- ber’s perspective, how can we translate what we are trying to do into something that is a bit more digestible?


You invest almost all of your assets pas- sively, but as DC assets grow do you fore- see a time when you will be more active and invest in different asset classes? The main challenge for master trusts at the moment is the fee structure. We have spo- ken to some great fund managers, with some exciting active strategies…and then


For DB schemes, alternative asset classes such as infrastructure are high on the agenda. Do you see a point when DC schemes will invest in these assets? It might happen sooner than we think and the reason for that is twofold. One is that the government has shown a desire for pension schemes to invest in these assets. Successful examples include the develop- ment of Kings Cross, where pension funds played an active role. When we have discus- sions with government departments, we often get the question why they are not investing more in these assets. From a trustees’ perspective, a lot of it is about things like the Woodford scandal. Liquidity is a big concern at the moment. The other issue is how to gain access to these assets. What is the investment vehi- cle that is being used and does there need to be some form of collectivisation, such as all master trusts working together and investing in Crossrail, for example? These things are being worked through at the moment, but from the discussions we have had there is a desire to take real assets


From the discussions we have had


there is a desire to take real assets more seriously.


the cost comes along and it just cripples us. Across the board we are seeing fees come down. If that trend continues then there is an opportunity for master trusts to enter the active space.


There might also be more engagement as you see with defined benefit (DB) schemes where they are talking directly to companies.


The caveat I would place on that with regards to ESG active strategies is that not all are created equally. It’s about lifting the hood and understanding what’s underneath. If it’s too good to be true, then it probably is.


more seriously. DC investment in infra- structure will happen. Because of that push from the government hopefully gates will open.


A lot of it will depend on the scheme as well. Smart is a relatively new scheme, our demographic is relatively young, so we have pretty good liquidity but that might not be the case for every scheme. The other side of it is that real actual returns are low. Every scheme is looking to get their target returns and maybe real assets will provide that. The obstacles we are facing at the moment could be removed and schemes can start looking at these assets and start including them even though they are illiquid.


Issue 89 | December-January 2020 | portfolio institutional | 21


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