Speaker 0:
Hello and welcome to another episode of Trustee talk here on Asset TV. Today I'm joined by Richard Hubbard, who is a professional trustee at Capital Cranfield. Hi, Richard. How are you?

Speaker 1:
All right, pretty good. Thanks. Hi, Sam.

Speaker 0:
So, Richard, um, today, we're going to be tackling a couple of different topics. Um, obviously, a lot of schemes at the moment are thinking about the end game.

Speaker 0:
Um, do you think that buyout is still the gold standard for for DB schemes, or should they be exploring other options as well?

Speaker 1:
I mean, I think I think for most most teams, it is the gold standard. It's also was the only target that they can realistically aim for. Um I mean,

Speaker 1:
without stretching the analogy, gold is a kind of expensive and very desirable product, but it doesn't necessarily mean it's attainable for all. Um, most of my schemes either are working towards buy in within a short number of years or definitely have that as their aspiration. Even my biggest. None of them are looking for alternatives to buy in and buy out.

Speaker 1:
Um, I know some of the the biggest schemes are allegedly trying to kind of maintain themselves, um, in, you know, even when close to future ruel et cetera. Um but But I think it's a small minority of schemes and certainly, um, when I worked for, um, a very large corporate, um each time we looked at the

Speaker 1:
possibility of keeping a scheme live for for whatever reason, it happened to be, um, maximising value for the company or funding some other pension liabilities. Once we scratched the surface, it only became a temporary solution. We were just deferring a problem that we were going to have, Which was, How do you handle this into maturity? You know, the life of the Schemes is an awful lot longer than the life of most companies. And to be confident that the sponsor is going to be there even if you don't think you need funding,

Speaker 1:
Um, you know, the insurance companies are much better set up than the most businesses for doing that in the very, very long term.

Speaker 0:
OK? And following on from that question, um, many schemes who are approaching a buyout are looking to sell their illiquid assets. How and when should they do

Speaker 1:
this?

Speaker 1:
Well, this is an interesting one. I mean, it's a really high quality problem to have, because mostly people are stuck with the liquids before a buy-in only because the funding levels have shot up and they're actually much closer to buy in in terms of time, um, than when they originally set their investment strategy. So, yes, there's lots of people complaining about the problem of liquids, but actually they should be very grateful that all of a sudden they've got portfolios that put them on the boundary.

Speaker 1:
Now there's there's a lot of different ways of of treating it, and it really depends on the shape of your scheme and and the particular characteristics of your employers. But But if you kind of work through it, um,

Speaker 1:
you know,

Speaker 1:
nearly everything done with investments done with notice can be done more efficiently.

Speaker 1:
Um, I'm very privileged on one of my schemes that we're absolutely skewered, um, by the the position with the illiquid portfolio. Um, but the employer very graciously, um I mean, it's a fairly substantial entity is willing to give us a substantial overdraft. Um, because, you know, providing cash from them is cheaper than the the the the cost of the deferred premium. I mean, sort of hand waving.

Speaker 1:
And most insurance companies will want a couple of 100 bits service on here to fund um, AAA deferred premium. And if the cost of liquidity to the sponsor or the sponsor sitting on cash, actually, it's more efficient for them to them to give you, um, the money for a few years.

Speaker 1:
Um, the other side of it is, um, there are actually quite good mechanisms in the secondary market. It just depends how much pain you're willing to bear. Now, you know, hearing numbers like 20 or 30% discount in it. An asset value can feel horrible. But if it's a mature asset and you've only got a small tail left, you may have had very good performance ov over time.

Speaker 1:
Um, and yes, you're taking a hit on that last bit, but it is allowing you to jump through the big hoop that you care about, which is achieving your gold standard of of getting to buy out. Um,

Speaker 1:
the the the place I would encourage people to think really cautiously is if you're going to a bank for third party financing. In theory, it's simple, but in practise There's an awful lot of detail, an awful lot of contracting, and it turns out to be expensive. Um, so I mean, I, I guess, given the choice, um, you know, be thankful you've got the assets. Um, ask the employer to help. And if that doesn't work, engaging with the insurance companies on deferred premium. And if that doesn't work, then taking a hit in the secondary market. Um,

Speaker 1:
I think that probably pretty much covers the ground in in three minutes rather than, um, you know, deep dive for 30

Speaker 0:
and let's finally move on to, uh, look at ESG considerations. How can schemes hold their asset managers to account when it comes to ESG and stewardship?

Speaker 1:
Oh, this is a really tricky area. Um,

Speaker 1:
I. I mean, if you start peeling back the onion, you know the fact we're mix mixing ES and G into 13 letter acronym. Um, I each of them is significant in its own right, but very different characteristics. Um, I have quite significant bugbears with the way, um, asset managers, um, sort of talk about their ESGC credentials because, you know, to one client, they are offering a light green portfolio to another. It's actually no ESG to another. It's a kind of hard core.

Speaker 1:
They say, You know, here's my principles you choose. In fact, I haven't really got any principles. I will just flex with the wind at the time. Um, I think there are two things you can ask them how they use ESG, but that's mostly a fairly banal and compliance process. And then you can ask them how they are engaging with companies and what difference their strategy is making not to the numerical characteristics of your portfolio, but to the behaviour of companies. So, for instance, something like the transition pathway initiative

Speaker 1:
it it doesn't per se. Trying to judge whether a company, um is, you know, doing well or not. It just says, Please tell us what your plans are to be a Paris compliant, and then it asks people to put effort, asks companies to put some effort into communicating that and explaining their strategy and explain their plan. Now, if your asset managers are part of that sort of process, that engagement makes a difference. If they're just

Speaker 1:
trying to build a portfolio that's got sort of some numerical characteristic like weighted average carbon intensity. Um, that can often be a both a meaningless and also a pointless kind of measure. Because in practise, if you've sold the shares in a company, someone else has bought those shares. There's no actual change in the behaviours or the emissions of the entity. What matters is making a difference. So the question to your employers is, how are you making a difference?

Speaker 1:
Sorry in question to your asset managers is How are you making a difference?

Speaker 0:
OK, Richard Hubbard. Thanks for joining me.