In the first of PP's Pensions Influencers interview series, Jonathan Stapleton speaks to Cliff Speed, chief investment officer of TPT Retirement Solutions
Who are the Pensions Inflencers?
PP's Pensions Influencers series aims to bring you closer to the trustees, scheme professionals and consultants who control and influence the allocation of scheme assets as well as those who have made a significant contribution to the industry during their career.
Over the coming months, we will be meeting these key players and revealing their views, looking at how they tackle the markets and how they manage their schemes.
In this episode, we meet Cliff Speed, chief investment officer at TPT Retirement Solutions, the organisation known until recently as The Pensions Trust.
Speed is responsible for the £9bn investment portfolio of TPT Retirement Solutions and is an experienced CIO and actuary who has over 20 years' experience in pensions investment and risk management.
Prior to joining TPT in 2016, Cliff worked at BlackRock where he led the firm's UK fiduciary offering and was responsible for the investment strategy and implementation for many significant UK pension schemes.
Speed was previously CIO of Paternoster; has also worked as an investment consultant; and played a leading role in introducing risk management techniques, including LDI, to UK pensions schemes from the early 2000s.
Speed is a qualified actuary who has been active in the profession publishing numerous papers. He has also worked as a university lecturer and in investment banking.
Jonathan Stapleton: Can you tell me a little about TPT Retirement Solutions (TPT) - the organisation formerly known as The Pensions Trust - and explain your role there?
Cliff Speed: TPT Retirement Solutions has now been going for about 70 years. We have over a quarter of a million members and paid out some £300m in benefits in the past year alone - essentially it's a consolidation vehicle for a whole load of pension schemes. As chief investment officer, I make sure I deal with all aspects of investment right through from strategy to implementation.
Jonathan Stapleton: During your career you've worked in a variety of different roles - as an investment consultant, fiduciary manager and also at an insurer. How did you begin in investment and what has your career path been?
Cliff Speed: It's fair to say my career has been somewhat varied and I've also spent some time in academia. While in academia, I looked at how assets and liabilities were being modelled and invested. I started from the premise that we only have pension scheme assets because there are liabilities - you must always remember that those assets are there to pay the liabilities.
I did a lot of work in bringing together those two separate sides, which many years ago were quite distinct. I wrote papers for the actuarial profession and tried to start the idea of liability-driven investment (LDI), working on some of the early LDI strategies which were implemented back in the late 1990s, early 2000s.
From there, it seemed quite a natural progression to start looking at doing this for an insurer so I helped with the setting up of Paternoster, and ran the insurance book for the insurer, taking on the liabilities of pension schemes and making sure they were invested in a suitable prudent manner to make sure they paid out all those benefits. I think that was great hands-on experience - taking the principles of what we want to do and making sure they're put into practice.
And then, prior to working at TPT, I was at BlackRock for 4 years where I again spent some time looking at LDI and helped set up an active LDI proposition and then worked on BlackRock's fiduciary offering - effectively working as an outsourced CIO for many pension schemes. Again, that's great experience. You're taking the problems and constraints which a set of trustees have and trying to solve those problem in creative ways.
Jonathan Stapleton: Obviously you joined TPT towards the end of last year. Can you tell me a little bit about how you're extending your previous experience into TPT and what TPT Retirement Solutions is doing now, what are your plans for the next 12 to 18 months?
Cliff Speed: Good question. So a lot of my career has been around risk management and really trying to make sure that outcomes are achieved with minimum risk. There must be some risk taking within pension schemes but you need to think about risk analysis right across the board - and that means not just thinking about the growth assets you will have, but what's happening in terms of defensive assets, and also the covenant, what can be borne by the sponsoring employer.
So one of the things we're working on at TPT is putting in place a framework to help us think through these ideas, broadening the assets so we aren't reliant on a few risk premia but we're generating those from many areas. And also making sure all the risk protections are in place - looking at what we are doing in terms of protection against interest rate inflation, currencies and asking if we need downside protections against various assets. So thinking about risk in a holistic way while making sure we achieve the investment outcomes to improve the funding. That's going to keep us busy for quite a few months.
Jonathan Stapleton: You talk about different sorts of risk premia and accessing a broader range of risk premia. Are there any particular areas where TPT isn't invested at the moment, where you're thinking that perhaps in the coming 12 to 18 months you might want to look at a little bit more closely?
Cliff Speed: TPT has had a wide range of investments and one of the impressive things is how it's moved relatively early into a lot of investment areas. I think that's important because the investment world is subject to cycles or fads and you need to be investing at the right time, when the valuations are attractive.
So I think that TPT has a good base, a broad base of investments. But it doesn't mean that we aren't continuing to look and extend things.
Like many larger pension schemes, we're looking at illiquid assets but you need to make sure you are getting fully rewarded for those. We have sufficient liquidity in the scheme, so if we can get better reward for tying up funds for a longer period, we're prepared to do that but the onus is very much to demonstrate that the return is worth the risk.
Jonathan Stapleton: It's been a common complaint among many pension schemes that some of the illiquid investments that they see are somewhat heady in price, would you agree?
Cliff Speed: I would agree. I think you always ought to benchmark against available liquid assets and the credit risk they bring. And then you have a look at what additional return perspective you have. You look at the complexity and the cost involved in that and you need to take some views around that and, if it is not clear, the answer is you don't invest. There needs to be really clear incentive to put your money into these areas and I think that some of the propositions have been, shall we say, fully priced and, particularly in an era of low yields, those fees can eat up a considerable part of the return. So there must be downward pressure on fees.
Jonathan Stapleton: You mentioned fees but more broadly, what do you think are the biggest challenges in investment at the current time? Would you see fees as one of those big challenges?
Cliff Speed: Fees are one of the challenges but the other challenge that I think everyone in the pensions area will recognise is complexity - both in terms of regulation and what trustees are expected to do. Investment is also an area that has been a challenge for many trustees, who may not come from an investment and finance background and are having to deal with the increasing use of more complex instruments.
So LDI would be a prime example with the use of swaps, repos, leverage and derivative instruments. That's broadened right across to other asset classes, with the use of derivatives being used there. Are trustees fully satisfied with what's going on? Are they aware of the degree of leverage? Do they have collateral managed directly? These are important questions you need to be on top of and get right and, unless you've got the time and energy to devote to it, it's going to cause complexity and potentially disappointment down the line.
So I think that points to pension schemes that are going to do well and use these to the members' advantage need to have good advice, they need to have good strategy, have a good team in place, to make sure these are implemented and implemented well, with sufficient safeguards.
Jonathan Stapleton: Turning to some of the myths and misconceptions around scheme investment, what do you think they are?
Cliff Speed: On the broader pensions front, I still think there is a lot of misunderstanding about scheme liabilities. And I don't think the idea of technical provisions helps. Essentially pension promises are made and were made without the credit risk so I think you ought to be looking at what money is needed to fund and to pay these pension promises without credit risk also. I think the range of different valuation measures can confuse trustees and some trustees think if they can get to technical provisions, they are done. Well no, that's just a staging post. You need to go further to reach something like buyout or self-sufficiency.
So I think the framework there is not as clear as it should be. I think then there's also confusion around the role of the employer covenant. Effectively if we think about the self-sufficiency level of assets needed in the pension scheme, anything below that you're effectively looking at providing credit to the sponsoring employer. I'm not sure many trustees think in those terms. And if you think in those terms, you get to the point of thinking that's actually your largest investment and questioning whether that is a sensible thing to be doing.
Then you can move on and start thinking about the underlying investments themselves. Again, I think there could be greater clarity around those. Trustees rightly are looking for greater clarity, greater transparency on what the costs involved are, what the returns are, and there has rightly been some scepticism around some areas of asset management over recent years and I think that trustees should continue to be very questioning as to what people are doing with their money.
I take quite a proprietorial approach to this. I consider this as our money, we're looking after it on behalf of members. Anyone who has the privilege of working with that should really be justifying themselves.
Jonathan Stapleton: Do you consider yourself a tough negotiator in these matters? You're sort of poacher turned gamekeeper - does that help?
Cliff Speed: Shall we say it's very educational having looked at things from different sides of the fence. So that experience has taught me some things to look out for and I think I've got a clearer idea of what we should be paying for and what we shouldn't. But I think I have a duty to be a tough negotiator and I wouldn't be doing my job for the members if I didn't try and push and get value for money.
Jonathan Stapleton: More broadly, what do you consider are some of the key attributes and the most important skills needed to manage investment successfully?
Cliff Speed: The two things I would say are, first, to try and be as objective as possible. Know what you're trying to achieve, try and put emotions to the side. That's very difficult because we all have biases and prejudices, even if we're not conscious of them. So you need to try and be as objective as possible, know what you're trying to achieve, have clear parameters as to what risks are acceptable and what are not acceptable. And then I'd say prioritise. I think we're fortunate to work in the world of investment, there's always something happening, it's always quite interesting and exciting, I'd like to do more but everywhere resources are constrained and rightly, they should be constrained - there should be a limit on the amount of time and effort you put into something. So think what is really important? What is going to give me the biggest impact? And then focus on those things. That may mean turning round and saying no, sorry, this is next year's business, or we'll come back to it.
Jonathan Stapleton: You talk about investment biases, what do you see as your biases?
Cliff Speed: Well, of course, we all like to think we're wonderfully rational and objective but I'm sure, like everyone else, I do carry those biases.
I think that my biases would lead me to setting high barriers for investment strategies which are opaque and expensive. I think effectively there's often too much complexity put into investment. It's relatively simple at a high level. You're taking someone's money and you are investing in an equity, a bond or some other investment. There may or may not be leverage involved.
And actually the capital structures in the western world are relatively simple. There are relatively few of them. So you can cut down and see where those cash flows are coming from. If someone comes to you with a super whizzy idea, ask yourself some hard questions. Why aren't other people doing this? Why does it work for me and it doesn't work for others? Why has this only just come about? Now there may be some really good answers to that and you can get advantage as first mover. But always start from the sceptical point of view, demanding transparency and knowing where those cash flows are arising from.
Jonathan Stapleton: I think you've probably answered some of this in your previous answers, but when you look at individual assets, individual asset managers, what makes them stand out and spark your interest? And conversely, what would encourage you to disinvest or to walk away from an investment?
Cliff Speed: Clarity would be the main element I look for, knowing what they're doing, why it works and also having awareness of when it might not work. What could cause this to fail? I'm highly sceptical of the picture, this is great, this has always worked, it will carry on working. To me, that shows sloppy thinking, that you haven't thought hard enough - there is no foolproof approach. So someone who is humble enough to know when things are not going to work is more likely to get my interest than someone who is saying it's all going to be rosy. That will be a very important element.
Why you would change, what can cause concerns? There are probably some standard elements there: again, lack of clarity, which may come from processes changing, people turnover, maybe altering what they think they need to do and ask them the question why? Has it not been thought through properly in the first place? You should be picking those things up fairly early. If that's feeding through into poor results, then probably you're behind the curve.
Jonathan Stapleton: Putting yourself in the mindset of the trustees, how do you go about doing that? How do you put yourself in the mindset of the trustees when you're thinking through some of those investment decisions?
Cliff Speed: I think I'm in a privilege position at TPT because, working with an in-house team, I think there's a real great alignment of interest. I mentioned earlier how I think about the money we invest quite proprietorially. It's our money, we're doing this for the members. And I think that feeds through into how trustees should probably be thinking about investment. We are here to protect the interest of the members, we're trying to do the best possible thing for them. So there's a very clear line of sight.
Whenever I look at an investment or a possible opportunity, I ask myself, does this improve what we're trying to do? Does it give me a chance of enhanced risk/reward trade-off? How does it fit with the rest of the portfolio? Does it provide value for money, clarity?
Another important thing is maybe how does it sit in terms of environmental, social and governance, which is again a key element and I don't think it's just from saying that we're doing the right thing. I do think it has investment consequences; by not giving sufficient attention to those areas, you could be exposing yourself to quite significant tail risks. And I think we're already seeing that in some environmental areas.
So I think I'm lucky in that we're very well aligned, what we're thinking of and what the trustees are thinking of. And most of the investment decisions I can basically come to and say well if it fits and seems right here for the members, the trustees and myself, there's going to be little conflict.
Jonathan Stapleton: What do you find the most frustrating part of your role as a CIO?
Cliff Speed: The most frustrating part would be people trying to eat up your time without a clear proposition or something which really fits. I can understand there are lots of people who have got propositions, who want to come and get some exposure, but I really only have time for someone who has thought it through and knows what they want to say and why it works. Someone who is vague and doesn't really know what they're trying to sell or propose to you is a frustration.
Jonathan Stapleton: A couple of final questions… Firstly, what's a surprising fact about you that perhaps not a lot of people would know?
Cliff Speed: For part of my childhood I grew up on the island of Tarawa in the Kiribas Islands, which was the scene of a big battle in World War II.
Jonathan Stapleton: And finally, you can invite four people to lunch, dead or alive. Who would you pick and why?
Cliff Speed: My first reactions are I'd pick a group of friends because that would be very enjoyable. But you gave me these supernatural powers, so it would be rude not to use them.
John Maynard Keynes would be a great choice I think, particularly with regards to what's happened since his death. I'd be very interested in some of his views on that. Florence Nightingale, is famous but also a great applier of science and a statistical pioneer. I think she'd be very interesting.
Finally, I'd probably go for Dostoevsky as a social commentator and also David Bowie.
Jonathan Stapleton: Cliff Speed, thank you very much.
This week's edition of Professional Pensions is out now.
Nearly 60% of UK employers consider defined contribution (DC) master trusts to be the "most suitable" pension fund for their employees, according to research by Buck.
Companies which have tried to dodge their pension duties by changing their identities are being "hunted" by The Pensions Regulator (TPR) in a crackdown on non-compliance with auto-enrolment (AE).
Removing liquidity restrictions would enable DC funds to capitalise on the potentially higher and safer returns that DB schemes have benefitted from, says Patrick Marshall.