In-house proud – Sally Bridgeland, CEO BP Pension Trustees

The BP Pension Scheme is an in-house operation, running around £14bn, which finds itself in the position of having a large and profitable parent. Managed by Sally Bridgeland, the scheme is targeted at growth and takes a sanguine view of market ­volatility – preferring  to take a very long term view. Here she reveals what makes the scheme tick,  gives her views on internal managers and the possibility of awarding external mandates.

What is the set up at the BP Pension Scheme?
We have got a team of nearly 30 investment professionals as part of the finance section of BP, which we call Treasury, that invest most of the funds on behalf of the trustee.
We have just over 70% invested in equities although we include private equity as part of that. There is a private equity specialism within our in-house fund management team and a property team as well, where we invest in direct and joint ventures in UK property. We also have some UK bonds, corporate bonds, which are outsourced. We have three different managers involved externally in running this.
Our target outperformance, the alpha side of the benchmark, is a fairly modest but ­sustainable 0.5% pa.
The active investment philosophy is very much to take risk only when you feel it’s ­going to be rewarded. Our managers are rarely up against the overall tracking error limit that we set for the ­portfolio yet have had consistent outperformance over the long term, which is ­really what matters.
On the trustee side, there are six of us who make up my team.
As the CEO I am an executive director ­responsible for developing policy and ­monitoring the operations.
Most of the ­governance around the fund management side, the monitoring, the ­reporting back is currently delegated to me. Effectively the head of our fund ­management team and I are our investment committee. So we do not have a separate investment committee which is a bit unusual.
We also have an administration team that is also in-house, as part of the HR side of BP. It’s about 60 people. So if you look across BP, there are close to 100 people involved in the running of this pension fund.
Most of whom are also members of the fund as well.
What are the benefits, as you see them, of running the vast bulk of your money ­in-house? Does it mean you are less prone to investment trends?
It allows you to have a sense of detachment from what other pension funds are doing, which can be a positive.
Our investment strategy has been very stable and is run similarly to a balanced fund – we have a strategic asset allocation but with ­flexibility for the fund management team to add value through allocating between bonds and equities, and the different geographical equity portfolios. Funds that use external fund managers running different parts of their portfolio can lose this ability and source of returns, unless they are able to find an ­investment service or governance structure that introduces this skill.
In a way, our team has never lost what a lot of funds were doing in the 1970s and 1980s ­anyway – and the stability of our team means that some of them have been around to see it through from then to their own retirements.  Given that the main dynamic that has driven the need to control risk has been the relative size of the pension fund compared to the size of the sponsor, this makes sense. BP’s growth has outstripped the pension fund. Unusually within UK pension funds we have still got that strong support to the pension fund.

How are your teams structured?
The equity portfolio takes up the majority of the resources, and the UK portfolio which is the biggest part is divided further into ­sectors. Within that there are teams of two people who are there to challenge each ­other’s ideas, and work together – while working very closely with the other teams.  This is particularly important when looking at stocks for multinational companies which could fit in a number of different portfolios.  The sharing of knowledge helps get ­perspective on where to find the best ­opportunities for the money we are investing.

Do you develop a house view?
Each fund manager has freedom to have their own style, which gives some style ­diversification across the team.
There are those who do bottom up company fundamentals, there are some who do pair trades – looking at this company versus that company, and their position around the benchmark. Others work building on themes; it really does depend on their view of what best works on the opportunity set that they have.
It is partly their view, their character and their preferences that have made up the track records they have.

When adding to the team, are you balancing the different styles?
I do not get directly involved in the ­recruitment because that’s not my role. But I know the head of investments ­constructs his team by looking at the skills and ­personalities involved, balancing people who can work well as a team but with a healthy amount of challenge. This is fundamental to a lot of business dynamics generally. You want to have an environment where challenging someone is safe, and it is not about competition.

Is it a stable team?
Yes, very stable.
We had some turnover, but we have got quite a lot of people who have been here for 15-20 years.

Are there plans to increase the size of the ­investment team?
At the moment we have been recruiting ­additional resource on the private equity side. That investment area is getting more demanding.

How do you access private equity?  
It’s a mix, the majority is now in funds, ­rather than funds of funds. But when we started off, because it was a new area for us back in about 2000, most of the investments were through funds of funds.

You have no hedge fund investments.
Why is that?
Fundamentally we want growth. So hedging out that long term growth does not seem to make sense. We are not in the same ­situation that a lot of other funds are, where either the funds are closed to new members or already maturing rapidly.
If a pension fund is in that run-off stage of its life, a fall in capital values really matters because it is much harder to get that money back – you will need to draw on greater ­support from your sponsor, or the ­investment returns.
This can lead to a ­downwards spiral and ­increasing of risk. If you are in the more steady state, where there is money coming in and there is ­money going out and it is pretty much in balance, capital values can go up and down, and you can stomach that risk. The funding level might be volatile, but ­actually you are not having to sell any ­investments at a loss.
So our philosophy is; we do expect there to be some growth in the world and we hope that is going to come through our ­investment strategy.
That in turn will give us more of a reserve to meet the uncertainties around the liabilities. Longer term we can move to safer i­nvestments as the liabilities mature.

What is your reaction to the market ­volatility?
It has been interesting, because it really has brought home to me that unless you have to sell, why should you worry? We have time for things to get better.
If you think this is capitalism falling apart, there’s a bigger ­challenge more generally for the world!
You have to go back to the fundamentals and say we have got shares in companies that as far as we can see are still doing business.
We still have our ‚keep calm and carry on‘ mugs that I bought in the credit crunch.
There are quite deep opportunities that might be out there because governments and sources of capital are fairly overstretched.  So, the more interesting question is; where are the investment opportunities that ­actually suit pension funds which do not mind ­illiquid assets?

You exploit your ­illiquidity premium
Yes, why not? Wouldn’t you?
If you don’t think you’re going to move until you retire, do you worry about house prices?
If you ­really believe you are not going to spend some of your capital for 20 years, you should make the most of that.
People lament the fact pension funds do not exploit the illiquidity premium. Why is that?
I think part of that is because the world of pension fund investment does focus so much on capital values.
For example, we have got a significant ­private equity holding, just over 10% of the fund. Our challenge has been how we measure the success of that. It is fairly easy for the quoted equities because you have got a benchmark you can use.
We try and compare private equity with ­quoted ­equity, but this does not help you ­understand the liquidity premium.

It is fair to say your sponsor took a wobble last year. How did you react to that?
Technically one of the things we have that helps us is a pre-agreed process with a legal structure in place with the company around what happens if we have a deficit.
We do an annual assessment, in between the triennial valuations, and that determines what the contributions are for the next ­calendar year. Our annual discipline means that we can translate that into the potential cash ­demands on the sponsor. When an event like Macondo happens, you then have a basis for making some rational decisions.
Our legal contract also offers the ­opportunity of a review if the credit rating of the ­company changes.

Which it did.
Which it did. So we were thrown into a ­review situation. On the bright side, that was useful. It is very difficult to prepare for the worst when everything seems rosy. The ­previous year we had renegotiated the legal arrangement and had the discussion when the outlook was positive, and talking about the downside was like thinking the ­unthinkable. So, in a way, it is easier to have that ­conversation when there are question marks. But it is also difficult, because the last thing you want to do is distract the company at such a time. The Treasury team did a ­fantastic job last year, which helped underpin their covenant to us as pension fund. It shows you the value of having contingency plans in place.

Does the industry following trends?
Yes, and I think it is easy to blame the ­consultants but it is really difficult to be ­innovative. In my experience, in my past life as a consultant, if you try to do something different, even if it is the right thing to do, it is very difficult to be the first mover. You are creating difficulties for either ­external or ­internal managers. You have to make t­rustees explain something that is new to their ­members and why they are doing something that is different. By following trends and ­doing what everyone else does, there is the safety in numbers and in being able to say that you have done your best. I can understand why we behave like that, and I think the intentions are ­usually good. Whether it is right or wrong, it is very easy to get caught up in the blame game, rather than being open minded and thinking about the future.

What makes a good in-house manager?
Somebody who really cares about getting the decisions right. And who knows that every position away from the benchmark is a ­decision. So, whether it is buying, whether it is selling – it is all about that balance. And not taking risk because that is what your sales person has told your client that you will do: only ­taking risk when you think it will be rewarded. But it is also somebody who has the ­personal resilience to move on. So if they have made a mistake, to get on with it.

You have two external fund managers for the UK corporate bonds. Why?
We did not have the in-house expertise for this type of investment. Part of it was ­also operational flexibility. We did not know how to use external fund managers.

Any plans for further external mandates?
There’s nothing immediately.

I can hear the groans coming from the City.
We are getting older. And there will come a time when we need to move from where we currently are. So, we have got important ­decisions to make over the next year or so around what we do. What do we want to try and build in-house, and what might we do externally? I have an in-house bias but we have got ­experience of doing both now which is great.

I think a lot of people would be quite ­interested in the fact you manage the fund in a three day week.
I think it is a lot easier to be part time when you are the boss. This is the one thing that if I had the time I would write a book about. In terms of the joys of working part time for both the individual and the company that they work for.
The biggest unquantifiable benefit of ­working part time is space. I can’t be ­thinking too hard about pensions or investments when I am helping my son with his homework. And it means that you have just a bit of ­detachment that gives you that wonderful man from Mars (or woman from Venus) ­opportunity to say: „If I started from scratch that is the way I would do it. And how do I get from where I am now to where I want to be?“ Which is great.

What was the big lesson you took from all that has happened over the last few years?
Not getting swept up in the hysteria. Being able to be detached. And I am going to sound like the actuary that I am, but you do need to take the ­emotion out of the situation.
There are times to be emotional and times not to be emotional. And in a crisis, it does not help anybody.