Business, Innovation and Skills CommitteeWritten evidence from BT Pension Scheme Management Ltd (BTPSM), Universities Superannuation Scheme (USS) Limited and Railpen Investments (RPMI)

As three of the UK’s largest defined-benefit pension schemes, BTPS, USS and Railpen we welcome the direction of Professor Kay’s final analysis and subsequent support by the UK government. By way of background our full submissions to the Kay Review’s interim and final reports can be found on the BIS website.

While the Kay Review successfully analysed the problems which arise from short-termism, we believe further action is required to address some of the major structural causes.

One key area we believe requires focus is the role of pension funds/asset holders. For example, we believe that pension funds must play a central role in the governance and operation of any investor body charged with a stewardship role for all investors. This is because pension funds in general are less conflicted than asset managers and tend to collaborate more readily. In addition, pension funds have longer term investment strategies as our liabilities or commitments may stretch into decades.

Please find attached a copy of a joint letter we wrote to Professor Kay ahead of his final report which we would like to submit as evidence to the Committee. We would welcome a meeting with the Committee to discuss these issues in more detail.



Dear Professor Kay,

Thank you for taking the time to meet with us on 21 June. We hope you found the discussion as helpful as we did.

As you write your final report and recommendations we thought it might be helpful to reinforce some of the key points we have already made in our respective submissions to you.

As you know, we support your key objectives to introduce measures which could shorten the investment chain and better align interests across the chain to the long-term interests of pensioners. We welcome your analysis that there is a problem of excessive intermediation.

We would encourage you not only to analyse the consequences of the way intermediaries behave but also to address some of the major structural causes of their short-termism. To prevent further divestment by the UK’s pension funds from the UK’s equity markets we would encourage you to consider two recommendations:

More scale in the pension fund industry should be encouraged to help owners better control their costs and their agents and reduce the need for intermediation. This is a particular problem in the defined contribution world, which is becoming in effect owned by the fund management community; aggregated vehicles with independent governance are likely to serve beneficiaries’ interests better.

Focus pension fund regulation and accounting on the long-term. The Pensions Regulator should allow for greater smoothing on the valuation of assets and liabilities, and the proposed Solvency II type capital requirements for pension schemes should be abandoned or delayed.1 These changes are vital for allowing pension schemes to themselves incentivise asset managers (internal and external) for the long term.

As three of the UK’s largest defined-benefit pension schemes, we have long recognised that stewardship is critical in protecting and enhancing the long term value of investments. While we recognise the need to link stewardship activities to investment decision-making, we do not believe that—given current incentive frameworks—it is in most asset managers’ interests to undertake effective stewardship activities aligned to the interests of our beneficiaries. It is for these reasons that we believe oversight for stewardship must rest firmly with the pension scheme Trustees and executives. We also recommend that your proposed institutional investor body includes organisations that are closer to the ultimate beneficiaries to ensure their long term interests are properly represented.

It would also be helpful if your report recognises that there are likely to be different solutions to the agreed problems. For example, we have each adopted different models, none of which, it is worth noting, involves outsourcing stewardship functions to external investment managers. USS has adopted a largely in-house investment management and stewardship function. Railpen’s investment management function is entirely outsourced with stewardship led internally with a partial outsourcing to a specialist provider. BTPS’ investment management is outsourced and stewardship is undertaken by Hermes Equity Ownership Services (EOS) which sits within the asset manager BTPS owns.

For the smaller UK pension schemes who decide to delegate their responsibility for stewardship, we would recommend efforts should be made to form collaborations between asset owners similar to the voting alliance between USS and Railpen, and the collaborative alliance of over twenty investors under Hermes EOS. There may be other viable solutions, and we would welcome our peers working to develop these.

We welcome your analysis of the problems we face in confronting excessive intermediation in the investment chain. There are short-term vested interests, as well as poorly-aligned incentive frameworks that need to be addressed. We would welcome recommendations that could help asset owners assert their authority and ensure they are able to act for their own long term interests including 1) tools to permit asset owners to achieve scale in negotiations with agents over costs as well as in stewardship activities, and 2) reforms to the pension fund accounting and regulatory framework that encourage long term investing. A bolstering of the FRC’s Stewardship Code, and particularly the role of asset owners as part of it, could also be an important element of aligning asset managers with owners’ long term interests.

Yours sincerely

Natasha Landell-Mills
Universities Superannuation Scheme (USS) Ltd
Frank Curtiss
RPMI Railpen Investments
Helene Winch
BT Pension Scheme Management Ltd

1 See OECD discussion note, Promoting long-term investment by institutional investors. Please also see point 3 in the submission by institutional investors “Proposals to tackle problems with IFRS –– submission to the Kay review”, 25 June 2012.

Prepared 24th July 2013