The relationship between The Pensions Trust (TPT) and Cardano is somewhat unusual in the world of fiduciary management.
The scheme, which provides pensions for hundreds of charities such as Oxfam and Save the Children, is a large master trust with £5.5bn in assets and a wealth of investment experience on its board.
Cardano looks after a portfolio of approximately £250m relating to historic defined benefit (DB) sections of TPT's growth plan - the original germ of the scheme which was set up in 1946, but now one of more than 30 schemes under its stewardship.
TPT chief investment officer David Adkins says the trust first began working with Cardano after conducting a regular review of its investment advisers in 2010. He explains: "At that point our sole adviser was Mercer, and they had accumulated an awful lot of knowledge about the trust.
"It was going well with them, and we liked the relationship with the lead provider, but we also liked the look of Cardano. However, we weren't really convinced Cardano could look after the whole piece, rightly or wrongly, because Mercer is a much bigger organisation."
So the trust decided to give Cardano a specific problem to solve. The growth plan is a particularly complex beast given its long history, and the board decided it needed more attention than its own investment sub-committee could provide. So TPT asked Cardano to work on the growth plan, leaving Mercer in place to advise on the rest of the portfolio.
Adkins says: "We didn't really have fiduciary management in mind when we conducted the review. We'd looked at it in a separate review, but Cardano was initially appointed under an advisory agreement."
Cardano worked on a specific question: whether to surrender a £280m bulk annuity policy (the trust chose not to because it would have resulted in an £18m hit to its balance sheet), and to work on an equity derivative investment.
Adkins stresses that the decision to take the relationship with Cardano to the next stage and start delegating decision making came from the board. He says: "The trust would have been very nervous about a fully delegated fiduciary arrangement, but we realised that, although we had internal expertise, this needed a lot of care and attention. With 35 schemes under our belt we couldn't always give it the care and attention it deserves."
The power of veto
To assuage these nerves, the trust came to an arrangement which allowed it delegate investment decisions while retaining the power of veto. It set up an investment sub-group (ISG) of its investment committee, made up of Adkins, the chairman of the investment committee and the chairman of the board, to exercise this veto. Cardano also appears before the full board periodically.
Adkins says: "Our restrictions are back to back with Cardano investment management agreement (IMA) restrictions, so if there is a restriction placed on us, it is also in Cardano's IMA, so neither of can do anything crazy; we are both accountable to the investment committee."
From the fiduciary manager's perspective, working with a board with such a range of investment experience is fairly novel. Cardano client manager Phil Page says: "We are working with seasoned investment professionals as part of the ISG and the wider investment committee which is a useful resource and a good model for other pension funds in the UK."
The fiduciary relationship between Cardano and the scheme has three distinct strands: a return seeking portfolio, a liability hedging portfolio and "advisory add-ons".
Page explains: "The return-seeking part of the portfolio makes up about 70% of the assets, and the ISG has full right of veto. We can't go ahead with anything without two of the three ISG members agreeing. Cardano takes the lead on ideas, but there's nothing to stop the ISG, which has a lot of investment experience, coming to us with suggestions."
He says the sub-group has two weeks to approve or veto a proposal, but in practice does so within two or three days. The scheme is yet to exercise its right to veto.
Over the first year of working together, Page says Cardano put forward 15 separate modifications of investment strategy or changes of manager, bundled together into five or six proposals for the ISG to sign off.
He says: "This right of veto is the main difference to how we normally operate. It's worked exceptionally well and things have generally been implemented within a week of the proposal going to the ISG."
With the liability hedging portfolio, Cardano has discretion within set parameters to make decisions about how much overall interest rate or inflation protection to put in place and which instruments to use. Actions with the advisory add-on label are ultimately decided by the ISG, with Cardano acting as a traditional investment adviser. These decisions have included the implementation of a swaption collar to protect against further interest rate falls, which Page says has proved to be a valuable strategy.
Adkins says the results of these arrangements have so far been very promising. The fund is outperforming its benchmark, which tracks a mixture of the change in the scheme's liabilities and a cash benchmark.
He says: "The performance has also been better than the change in the value of the overall liabilities over the first year and a bit. But just as importantly there has been a stable outperformance; the way in which the assets have performed relative to the liabilities or the benchmark has been much more stable than a typical UK pension fund approach."
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