In a wide-ranging conversation with AIQ, the self-described “disruptive capitalist” whizzes through the highlights of a varied career and ambitions for his latest venture, the UK’s first consolidating pension ‘superfund’. Words by Miles Costello.
If Edi Truell were king, he’d get a lot of things done, very quickly. He might start by fast-tracking approval for his own pet projects – some of which have become snared in Whitehall’s famously silken weeds – think pension superfunds or giant subsea cables bringing low-cost power to the UK from Iceland.
If Edi Truell were king, he’d get a lot of things done, very quickly
A short while later, though, and ‘King Edi’ will have looked to plug what he estimates to be a £1 trillion deficit in the NHS’s final salary pension scheme and rescued the retirement schemes of a handful of collapsed high street retailers – hopefully to the benefit of tens of thousands of former shop-floor staff.
He would also have moved to merge a multitude of disparate pension schemes and used the collective investment power harnessed to fund, en masse, the building of much-needed schools, hospitals and roads – perhaps even rolling out superfast broadband nationwide for good measure.
That wouldn’t be a bad start, particularly for a monarch who in the eyes of many started the role with a somewhat wonky crown.
Maverick or disruptor?
Obviously, there is scant chance of his fulfilling the daydream of the child in AA Milne’s well-known poem If I Were King. But then, who and what is he, this Edmund Truell: an undeniably ‘Marmite’ figure who has been at the centre of some of the UK’s biggest deals over the past 25 years, but divides opinion as easily as he conjures up ideas?
The default descriptor of him as a “City financier” or “maverick entrepreneur” doesn’t quite capture a businessman whose interests have spanned private equity, pensions, insurance and banking, all of them peppered with regular acquisitions and sales. And that doesn’t even touch on his stints running London’s pension fund authority, creating openings in the corridors of power and advising Boris Johnson when the UK prime minister was the capital’s mayor.
Speaking to AIQ while en route from Geneva, Switzerland to the UK – for an essential trip that would entail a period in quarantine – the closest Truell can get to defining himself is as a “disruptive capitalist”.
That, in itself, is a reference to another of his ventures, the investment firm Disruptive Capital that acts as an umbrella for the ownership of businesses including Pension Insurance Corporation (PIC), the retirement scheme buyout group; Telent, the telecoms company that PIC bought; and, most recently, a stake in the gene cell start-up, Virocell Biologics.
I am disruptive in the sense that I look to disrupt the norms in large markets
“I am disruptive in the sense that I look to disrupt the norms in large markets, whether that be pensions or insurance or private equity, or some of the other things I’ve done over the last 25 years,” Truell says.
As an example, he cites the merger in 2016 between one of his businesses, Imagine Publishing, and its larger competitor Future, claiming credit for helping to forge an online media business with a £3.8 billion market value and a position in the FTSE 250, plus a hand in a subsequent overhaul of senior management at the combined group.
“For about two years, I tried to buy Future Publishing and they refused to sell. So, what I then did was merge in another business I owned called Imagine Publishing, which had made good strides in terms of technology and moving its content online.
“I put the two together and owned about 30 per cent of the combined company. I very much, shall we say, encouraged management ... ‘strengthening’ is probably the nice way of saying it, with Zillah Byng-Thorne and Penny Ladkin-Brand [brought in, respectively, as chief executive and chief strategy officer].
“And so off we go: buy and build, acquire things, turn them around, move old-fashioned magazines onto digital platforms; I backed Zilla to acquire an e-commerce capability and it’s all gone incredibly well.”
From Duke to PIC
Whatever he might be, Truell was forged in his modern form at Duke Street Capital, the successful European private equity group that he effectively founded in 1998 and ran for the best part of the next decade before staging his own exit through a sale in 2007.
There, he pioneered financial techniques including one named, not King, but Duchess, that was to propel him into the next several decades and the arcane world of pensions and insurance. “I was a first mover at Duke Street, in Duke Street Capital Debt Management. I did the first €1 billion leveraged loan collateralised loan obligation (CLO) in 2001. And I learned you can make as much or lose as much money on liabilities as you can on assets.
For the success of the Duchess debt fund, the match between assets and liabilities was crucial
“The key for me, and the success of the Duchess debt fund, was that we were able to raise 15-year money at, call it one per cent a year above Libor,” he adds. “Armed with that long, illiquid cash from the liability of the debt we’d raised, we could then invest with real certainty into shorter-dated assets. The match between assets and liabilities was crucial.”
Now, the concept of raising cheap long-term funds and using them to generate higher returns from shorter-term investments feels familiar, but back then it was an adventurous idea.
“Then I did the buyout of Paymaster – which had been founded in 1836 as the Office of the Paymaster General – and that got me into pensions administration. I saw how useless most of these pension funds were; but I also saw how economies of scale could be enormous.
“Lots and lots of pension funds do their own administration, but if you move them on to a platform, like Paymaster [now called Equiniti], you could save 90 per cent of the overheads. It’s just a waste of money. That cost saving is risk free and goes straight to the bottom line. And you don’t have to take as much risk with your pension fund assets as you might have to do otherwise to cover all the overhead costs.”
Truell took his acquired knowledge of the debt markets, which also included techniques such as dynamic interest-rate hedging for the Duke Street funds, and combined it with what he’d learned in pensions administration. With the aim of applying his approach to both the assets and liabilities of retirement schemes, in 2006 he and his late brother Danny created PIC.
Arguably, that was where the controversies started. His new venture triggered alarm in some quarters, including at The Pensions Regulator, because of its strategy of trying to take over companies solely to gain access to their retirement schemes.
The regulator was called in by the trustees at Telent and initially blocked PIC from making its own new appointments
Telent was probably the highest profile. Following the near £400 million acquisition of the group in 2007, critics accused PIC of trying to find ways of raiding a £500 million escrow account designed to cover shortfalls in the pension scheme. The regulator was called in by the trustees and initially blocked PIC from making its own new appointments, amid concerns policyholders might lose out.
On this, Truell is defiant. “To get going with PIC, we bought the company to get the pension fund. That played to my private equity experience. If we take the first deal we did, for Thorn [an electronics company] and for Threshers, we analysed the value of the operations and we sold them on very, very quickly.
“Thank goodness, you might say in the case of Threshers [which subsequently went into administration, though it still trades online]. And then we were left with the pensions. Then we, perhaps regrettably, put our people in to manage those pension funds; and it was this that caused the regulator conniptions.
“But I think we were fundamentally misunderstood. We did a good job with the pension funds. I still get Christmas cards from Threshers people. They got full pensions, despite their operating company going bust. In the case of Thorn, we gave them an upfront increase in their pensions of around five per cent.”
Those terms are clearly more favourable than the 90 per cent available to members of schemes that go into the Pensions Protection Fund, the government’s scheme lifeboat, when their employer goes under.
“If you take Telent, where the pension fund was 15 times the size of the operating company, over the past decade or so one’s done a very good job with both sides of that operation. On the pensions side, we did exactly what we said we were planning to do and ten years later we did Britain’s biggest ever pensions buyout. I felt at the time very misunderstood by the regulator.”
Superfunds and systemic risk
Despite that experience, both sides are in communication again over Truell’s most recent big idea – The Pensions Superfund, which looks to take bulk transfers from existing defined benefit schemes and pool them together to create one large occupational pension scheme.
According to the blurb on its website, the superfund will offer “advantages of scale so we can achieve higher returns with lower costs, greater stability and less risk; great news for employers, members and trustees”.
However, Truell says the regulator is worried that the superfund could become so large it would pose a “systemic risk” to financial stability. “I wouldn’t be surprised if we have £100 billion under management in due course. And if that goes wrong, then £100 billion is of systemic risk to the UK,” he says, though with characteristic bluntness he dismisses the argument as being “somewhat incoherent”.
It would be better to have £100 billion of pensions run properly than diffused among a bunch of enthusiastic amateurs
“I personally think it would be better to have £100 billion of pensions run properly than diffused among a bunch of enthusiastic amateurs. After all, over the last 12 years UK corporates have put £263 billion in special contributions into their pensions, and the funding position is no better than it was then. That is scandalous.”
His grand plan for the superfund, which has been registered with HM Revenue & Customs but still awaits a final sign-off from the regulator and a regulatory framework, is a bold one. In essence, it is to stitch together a multitude of public and private sector retirement schemes, both assets and liabilities – saving on administration and management costs – and use the resulting mega-scheme to fund, among other things, landmark infrastructure.
“We will drive economies of scale, so you run it as one single large fund. With economies of scale you can efficiently hedge what we call the ‘unrewarded risks’ – interest rates, inflation and longevity risk,” Truell says.
“I then know with certainty what my cash outflows are going to be for the next 30 years. Once you know that, you can then invest into a prudent portfolio – 80 per cent of that is in high-grade bonds and hedging instruments and 20 to 25 per cent goes into private markets. At London [Pension Fund Authority], I put 45 per cent into private markets.”
Plugging the infrastructure gap
Intriguingly, unlike most pension fund and insurance investors, Truell’s superfund would be happy to invest equity in the early stages of an infrastructure project, before it is up and running and generating revenues.
“Private markets, infrastructure in particular, are a very good long-term investment, because most of the revenues are either explicitly or implicitly inflation linked. And you’ve got bond-like cashflows off your infrastructure, which give you a real return. There aren’t many assets around these days that give you a real return after inflation.
There’s roughly £500 billion of infrastructure requirement in the UK alone
“There’s a massive gap in the market, because the insurance industry will buy infrastructure debt all day, but infrastructure equity is in short supply, and it’s in particular short supply for development projects, as opposed to buying London City Airport for the third time. And there’s roughly £500 billion of infrastructure requirement in the UK alone – think of renewable energy, transport, healthcare. I’ve done quite a lot of work with King’s College – what a rabbit warren of buildings; the whole thing needs to be knocked down and rebuilt in an integrated way.”
He notes some local authority pension schemes, and “superpools” of funds he’s worked with, have already been enthusiastic backers of development projects. These include the Local Government Pension Scheme, through a joint venture, and Border to Coast, a £35 billion-plus pensions superpool [where the assets are merged but not the liabilities] chaired by Chris Hitchen, who also chairs the Pension Superfund.
“We have done it. Boris [Johnson] asked me in 2015: ‘How are we going to get £50 billion in infrastructure equity into the UK? And I said: You’ve got to have superpools and superfunds.’ The proof of the pudding is that the superpools have put £10 billion-plus into infrastructure. That’s a great start, but £100 billion to go, as it were.”
As soon as he can get going, Truell says his fund will also target the schemes at vulnerable companies in, for example, the retail, travel and leisure sectors (he recently tried but failed to rescue the Debenhams pension fund). As well as claiming to offer pensioners a better deal than the PPF or an insurance-linked arrangement, he would also give them a potential annual “member bonus” if the fund’s returns are strong.
We would start by rescuing what we call the PPF clusters
“We would start by rescuing what we call the PPF clusters – that list of retailers, travel companies and whatever [still trading but looking precarious]. We would do a deal whereby, as best we can, we would offer them full pensions – plus this chance of having a member bonus.
“Forget the bankrupt retailer, for a moment, let’s take a normal, say engineering company. The Pension Superfund moves 100 per cent of the assets and the liabilities on day one. We’re not going to subsidise that engineering company. If there are 100 of liabilities in the pension fund, you need 100 of assets. But they might only have 80 of assets in the pension fund, so how are they going to make up the 20?
“When PIC took the Boots pension scheme on, they didn’t have enough assets. So we took eight of their largest superstores – we leased them back to Boots – and that made up the difference. They continued to operate those stores, but the ownership was transferred to the pension fund.”
Truell argues that by taking this approach to scheme liabilities and assets, the Pension Superfund can effectively guarantee that it will be a fully funded retirement operation, on day one and into the future.
Yet, despite having lined up £1.5 billion in backstop capital – and held discussions with schemes totalling about £200 billion of assets – the superfund is not yet in a position to begin consolidating at pace.
“It’s been a much more onerous process than setting up an insurance company, which I’ve also done. There’s deep frustration, because we’re ready to roll. I’ve been, for me, remarkably patient. The regulator issued guidance in June of last year. And under that guidance, they wanted to approve, basically, superfunds. We have provided 7,000 pages of documentation. We have agreed all the principles under which we operate. And yet, they're at the stage where they’re asking the trustees: ‘What have we missed?’ I don’t know what’s been missed – it’s all there.
“If we have a legislative framework, we’re hoping that would give them a route map. As soon as we get going, thousands and thousands of pensioners are going to finish up in the superfund.”
Truell says that, as a result, the regulator has decided to “gold plate the exercise” with the superfund. The base requirement is that it has enough capital to have a 99 per cent probability of being able to pay its pensioners, over a full five years.
We have to share lots of analysis with the regulator to show we are more than fully covered
That is more onerous than the one-year requirement imposed on banks and insurers, he says. “Banks have to work on what’s called a 99.5 per cent probability, whereas our equivalent would be 99.8 per cent. We have to share lots of analysis with the regulator to show we are more than fully covered.”
Still, Truell reckons the £1.5 billion in backstop capital would be enough to stand behind a superfund with about £20 billion in initial retirement assets. “The way it works is we would typically charge the employer a risk premium as a contribution for taking the pension fund off their hands. We might say that if we take 100 of liabilities, we need 100 of assets, then on top we need another seven or eight per cent for us to take on your risk.
“If it’s seven or eight per cent, let’s call that £1.5 billion. That, plus £1.5 billion in backstop capital is £3 billion, which is 15 per cent of £20 billion. I would expect to do that in year one.”
Despite obvious frustration at how long it is taking for the superfund to get up and running, Truell’s determination to succeed is tangible. He is also involved in renewable energy through his Atlantic Superconnection, an ambitious project that aims to construct a 1,000-mile-long pipeline between Iceland and the UK.
The idea is that the cable, placed beneath the seabed, would transport geothermal and hydroelectric power generated by Iceland’s volcanoes and hot springs at a far lower cost than, for example, nuclear energy.
Despite failing to win financial backing from the UK government Truell is pressing on with the superfund
Truell has been pressing on with the venture, despite failing to win financial backing from the UK government via subsidies. “This project stands on its own two feet anyway,” he says. “We’ve spent the last few years working away in the background. But I want to put it all together quietly and then just announce that we’re done.
“It’s a very long-term project; it’s going to be another six years before it’s finally built. You know, £3.5 billion infrastructure projects don’t get built in a hurry. I’m working with some of the biggest investors in the world to make it happen.
“It’ll end up being the lowest-cost producer in the UK of baseload, standby electricity; a third of the cost of nuclear, if not a quarter, while bringing in a nuclear power station’s worth of power. We’ve already agreed a connection agreement with National Grid. It’s all whirring away, but I don’t really want to make any noise about it until it’s complete.”
Truell may never be king, even for a day, but he is extremely accomplished at holding court. During a conversation that was disrupted by inconveniences such as passport control and the approval of his passenger locator form, he spoke in detail about numerous of his previous and planned ventures.
Truell may never be king, even for a day, but he is extremely accomplished at holding court
This included turning around London’s pension funds, which were only around 50 per cent funded when he arrived in 2012 and were more than 90 per cent financially secure when he left three years later. He also spoke of Johnson, and how – after a little schooling – the PM understands pensions.
The fantasies of the child in AA Milne’s poem have at their heart fun and enjoyment. Truell is likewise playful, cheeky – and regularly rude about the establishment and its practices – but the essence of both him and his subject matter is also indefatigably serious.
Miles Costello is a multi-award-winning writer and journalist.