When Michelle Ostermann came to the UK to work for RPMI Railpen, in the beginning of 2019, she was surprised by the number of closed corporate defined benefit schemes in the UK.
However, her current reality is not very different from her past experience – she worked with open DB schemes for 25 years in Canada – since the Railways Pension Scheme is one of the few remaining final salary plans in the country.
DB schemes do not give enormous income, but they give a base amount of income to make sure that the basic living is covered
Michelle Ostermann, RPMI Railpen
Ms Ostermann is a firm believer that these pension funds are still fit for purpose in today’s society. She says: “I find there is a nobility to what we do. I am really drawn to the fact that many of the members who are in these schemes do not know we, Railpen, the investment manager for the railways pension schemes, exist and they will probably never know us.
“Nonetheless, it makes me feel genuinely proud that DB pensions provide a benefit to society.”
She notes that there are people who do not save enough, do not know how to invest when they are saving, and are in risk of outliving their money.
“DB schemes do not give enormous income, but they give a base amount of income to make sure that the basic living is covered.”
Ms Ostermann, who will assume the role of RPMI Railpen managing director of investments in December – the first woman to be appointed to the position – stresses that one of the challenges for the investment manager and the railways scheme is to try to find a balance.
“There are three levers for us to play with when finding the right balance for these schemes,” she says. “We have to make sure we have the right amount of contributions coming in, we have to invest them properly so they grow over a long time horizon, and we have to ensure that we have sufficient funds to be able to pay retirement incomes.
“We might look as if we are just an investment manager, but we are not; we are a pension investment manager, and everything we do has to be aligned with that outcome.”
When she first joined RPMI Railpen, in charge of £30bn of assets, Ms Ostermann learned that about 75p of each £1 of a retiree’s income comes from the compounded investment growth.
“The investment strategy, which does most of the heavy lifting, is where we have to focus most of our effort, because the biggest risk an open scheme like ours faces is longevity risk, especially if inflation rises and returns fall. Our investment strategy bears a lot of responsibility,” she adds.
