The co-chair of the First UK Bus Pension Scheme Trustee discusses COVID-19, ESG and the state of the UK pensions industry.

As co-chair of the First UK Bus Pension Scheme Trustee, a closed defined-benefit (DB) plan that has assets of £1.4 billion and represents around 24,000 members, Richard Soper sees his primary remit as “giving strategic leadership, and to ensure the board benefits from as wide a variety of voices as possible”.

Building partnerships helped develop a common purpose between scheme and sponsor

To that end, Soper, who is also chair of the scheme’s investment committee, believes the experience he gained holding board-level positions in the public transport industry has come in handy for his pensions work. This includes the key role he played during the formation of the scheme, which was born out of the amalgamation of 26 independent schemes – which he describes as “a complex process”.

While studying to become a Chartered Director was “great preparation for the strategic focus and governance rigours of being a pension scheme trustee”, building partnerships and influencing were an integral part of his professional career. This, Soper adds, helped develop a cohesive board and common purpose between the scheme and its sponsor.

In addition to his pensions work [he is also chair of the Royal Opera House Pension Scheme], Soper leads an independent public transport consultancy and recently completed an MA in History of Art.

In a wide-ranging interview, Soper spoke to AIQ about his key priorities and the importance of member engagement.

How did your involvement with the scheme start?

When I joined FirstGroup as a managing director, I ‘picked up’ three local schemes – there were 26 in the Group at that point. I’d always managed to delegate pensions in my professional career until then but found it all far more interesting than I ever imagined.

Subsequently, I became involved in a fascinating, long-running series of negotiated mergers to turn those 26 schemes into a single entity, and at the end emerged as one of the trustees of the new super scheme.

You share the chair with another trustee. That seems an unusual arrangement; how does it work in practice?

This was a result of the merger. The trade union (now Unite) was actively involved in that process and, as it developed, the ethos of the new, modernised scheme felt more and more like a partnership endeavour. The idea of co-chairs and an equal number of member- and employer-nominated directors emerged from that.

Value is added to the quality of decision making by having a greater diversity of backgrounds amongst the directors

My member-nominated co-chair is still employed by FirstGroup as a craftsman in Glasgow, but he is also still an active leader within the trade union. It is hard to overstate how much value is added to the quality of decision making by having a greater diversity of backgrounds among the directors.

What do you most enjoy about the role; is there anything you find challenging?

I most enjoy the ‘fuzzy-edged’ areas – negotiating the recovery plan with the sponsor and especially the investment strategy. They are the most challenging but also the most satisfying.

How active are the members in putting forward their views on how the scheme is performing or being run?

Not as active as I and the other trustees would like! We put a lot of effort into encouraging members to get engaged with their pension arrangements but I suspect if a member believes you are doing the best for them, they choose to spend their time doing other things. This is perhaps a hangover from the old, slightly paternalistic DB ‘one-size-fits-all’ culture. Clearly that has to change with the growth of defined-contribution (DC) schemes and pensions freedoms.

What are your main priorities for this year and beyond?

Increasing member engagement is one – we’re working with the sponsor to improve member understanding of their choices. Making further positive moves on ESG and realigning our investments towards credit (and de-risking) are two more, and focusing on data – both data/cyber risks, and the quality of the data itself – is a fourth.

What do you see as the bigger issues facing schemes like UK Bus?

We still have a funding shortfall, so filling that is a key issue naturally. Additionally, the compliance requirements in the pension sector continue to grow, which has a knock-on effect in terms of governance. As mentioned, the other big issue is ensuring members – especially those who have stakes in both DB and DC sections – properly consider their choices and how their pensions fit into their wider personal financial situation.

How do you manage the investment of the DB fund in practice?

We have an investment committee, which I chair, with six members – three each from the trustee board and the sponsor. There is a facility to refer any serious disagreements back to the trustee board but, thankfully, it has never been needed.

We have some very good people from the sponsor working collaboratively with us with a genuinely shared purpose

It works well and closes off the inevitable arguments about decisions that with hindsight look, shall we say, suboptimal. It also means we have some very good people from the sponsor working collaboratively with us with a genuinely shared purpose, which I believe produces good results. I would recommend the model.

What’s your assessment of the investment environment – are you optimistic, pessimistic, somewhere in between?

Markets continue to behave in ways that suggest uncertainty – despite the continuing bullishness in some asset classes. It’s a period of great change – financial, economic, political and social – both end point and pathway are still unclear. The pandemic has accelerated underlying changes in the economy: some efficiencies have been revealed, but changes to ways of working (and living) have wider effects and many of these are potentially negative or at least disruptive.

The fundamentals of the economy, inflation and interest rates, drive pension scheme risks more than anything, and of course explain the popularity of hedging. However, since the 2008 financial crash, the movements of both seem to have been comprehensible only in hindsight, and often driven by apparently one-off events. I’m concerned that the full impact of some macroeconomic effects, such as globalisation and quantitative easing, still aren’t properly understood, and the pandemic – and the scale of Western government interventions – has added massively to this uncertainty. We’re beginning to see some of these impacts emerge as apparent ‘collateral damage’ in the form of political instability and increasing wealth inequality.  

Having said all that, and by way of balance, it’s remarkable how often in the recent past ‘Keep calm and carry on’ has turned out to be the right answer to these big questions for pension schemes. But with so much uncertainty, there’s been no time in the last twenty years when I’ve felt so supportive of hedging away the economic risks.  

Do you feel the range of investment options for mature schemes is limited, particularly given interest rates and fixed income yields are likely to stay depressed for longer?

We have managed to find long-term investible opportunities, including those that capture an illiquidity premium, at a wide range of risk levels in equities, credit and real assets. I can’t remember an occasion where we deduced a desired investment outcome that we couldn’t replicate in some way in the real world.

Some opportunities can be in short supply, but they tend to be very specific and are maybe more likely with real assets

On reflection, some opportunities can be in short supply, but they tend to be very specific and are maybe more likely with real assets. I remember we made an ‘in principle’ decision several years ago to invest in farmland, and then couldn’t find a route in at the right price at the right time, so it can happen.

How are ESG factors shaping your investment strategy?

We now consider these factors at every stage. The environment has long been recognised as an area of risk, so we insist all our managers routinely report on environmental aspects – at least then we know they are all considering it and they know it’s important to us.

We also have a declared policy of trying to progressively improve all our investments on E, S and G grounds – ideally through changes in manager behaviour, but potentially through divestment (although we’ve never actually done that).

The trustee board and investment committee believe there is no return penalty for being positive on ESG, and therefore feel able to consider ESG as not only a reducer of risk but as a desirable characteristic in its own right, and a specific source of investment opportunity.

We strongly believe that even though we invest through funds rather than directly in the underlying businesses, we can contribute to creating a wider positive movement around ESG, particularly the environment.

Have you set any ‘hard’ targets in terms of ESG?

Yes, we’re in the course of adopting a net-zero carbon emissions target and have recently decided to join the Institutional Investors Group on Climate Change and adopt its net-zero investment framework. We’ll start with the Paris 2050 target, but our sponsor has a 2035 target for its business and we many decide to do the same as we progress.

Additionally, we are currently reviewing investment advisor appointments and have added specific ESG capabilities to our requirements. All our managers’ ESG credentials have been reviewed and rated for several years now.

There’s much debate around greenwashing and rising concerns about a green bubble, with investors overpaying for assets marked as sustainable. Do you have any concerns?

Yes, on both counts. You need to be robust in your challenges to managers’ statements. In my experience, the most superficial forms of greenwashing quickly fall away once the manager realises you’re serious about ESG – it’s never a good look when the representative of a manager who presents on a strategy lacks the appropriate knowledge.

Getting agreed standards for the measurement of carbon and environmental impact is now a very high priority

In some ways, it is understandable managers might seek to ‘over-green’ their products because of the growing awareness and reporting requirements. The development of common standards and conventions – which are coming, but still feel some way off – should largely deal with that. Getting agreed standards for the measurement of carbon and environmental impact is now a very high priority.

In respect of the ‘green bubble’, you need to put impact investment opportunities through the same financial risk/return tests as any other investment. If it becomes too expensive, it could be time to look at the theme in a different way. The carbon question is now something that inheres everything and is itself a fundamental quality of every investment. In that sense, you can be a responsible investor in the way you consider any opportunity.

You also manage First’s DC auto-enrolment arrangements; how does that work?

Our DC committee is chaired by my member-nominated co-chair. This, like the investment committee, is run on partnership lines with membership from both sponsor and the trustee. As a responsible, labour-intensive employer, the sponsor is committed to actively encouraging take-up of its DC offering and improving it over time. This arrangement gives them a hands-on way of working in partnership with trustee and staff representatives, while ensuring the costs are effectively controlled and expenditure is directed where it will be most effective.

From the trustee’s point of view, it helps ensure the 3,500 members who have legacy DB pensions in the scheme are encouraged to consider them alongside their current DC savings as two parts of a whole.

What are your broader views on the state of the pensions industry in the UK? Are current and future retirees getting a fair deal?

In many ways the industry is in a better place than it has been for a long time. Auto-enrolment has been a great success, although I regret that in some cases it has occasioned the employer’s effective withdrawal from active engagement in their employees’ retirement provisions – they write a cheque and leave the rest to the master trust.

Personal financial awareness is still a huge issue across the population. There are things coming – such as the pensions dashboard – that will help and there are also great examples where employers have recognised that supporting employees in their personal financial decision making can mark them out as an employer worth working for. I also believe the work being undertaken by a number of industry leaders on retirement lifestyle illustrations are really good. But we have a long, long way to go.

In relation to the schemes themselves, I have always been a champion of the principle that the more diverse a board, the less the dangers of groupthink, which I am sure was one of the main contributors to the global financial crisis. 

Unfortunately, several separate industry trends have resulted in more and more trustees coming from a professional pensions background. That’s not to say that paid independent trustees don’t have an important contribution to make, because they certainly do. But I think something important is lost, and the nature of trusteeship changes when the trustee directors become too much like the other advisors and suppliers in the room.

What do you make of the UK Pension Schemes Act? The Pensions Minister describes it as historic – is that a fair assessment? Are there any gaps you would like the government to look at in future?

Yes, it’s certainly historic, although much of it continues trends that have been growing over the last five years or so. Some parts, such as the dashboard and collective DC – which I have long thought would be an important innovation – should be genuinely helpful.

The presence of criminal sanctions can encourage a compliance-minded rigidity

In respect of the new Pensions Regulator powers, we’ll have to wait and see how these work in practice. They are clearly part of the increasingly strong regulation of pensions and should help to ensure pensions remain salient in the minds of corporate leaders at times of financial stress.

However, like so many strong interventions, I do worry about the unintended consequences and the change they can bring to the atmosphere of ‘business as usual’. The presence of criminal sanctions can encourage a compliance-minded rigidity when what is actually needed is inventiveness.

The challenges pension schemes face often demand risk-taking and subtlety, and my fear is that the new powers may discourage this. And in training sessions, the look of horror on many trustees’ faces as the new powers are explained tells its own story and could especially discourage member-nominated trustees from stepping forward. 

It’s a real pity that such wide powers have been used to address what are actually very specific abuses. Let’s hope the regulator will make a priority of demonstrating these powers will only be deployed in extreme cases.

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