Railways scheme on track with cost management

Earlier this year, RPMI said it had hired someone to investigate pooled investment costs. This prompted the fund to simplify its range of pooled funds and reduce external asset management, among other investment changes.

“We have saved around £100m in headline management fees through the changes in our investment arrangements,” said Ciaran Barr, investment director at RPMI Railpen.

For us it is the net returns to the scheme that are the most important factor

Ciaran Barr, RPMI Railpen

However, Barr said that the fund prefers not to focus exclusively on saving money. “For us it is the net returns to the scheme that are the most important factor, which means balancing the cost with the expected returns. Cost savings that lowered overall net returns would not be beneficial,” he said.

Some single asset class pooled funds, including a hedge pooled fund and a real estate pooled fund, are now wholly owned by the scheme’s growth pooled fund, according to its latest annual report.

The scheme also significantly reduced the number and scope of external companies used to manage its assets.

Last year, it invested more in equities through alternative risk premia strategies, “which identify underlying drivers of return and build portfolios cheaply and systematically”, the report states.

Source: RPMI Ltd.

Barr made it clear that the reorganisation of the scheme’s pooled fund range was not driven solely by a desire to cut down on costs, “but primarily to improve and simplify the choice of vehicles for our stakeholders”.

While no further changes are expected in the short term, Barr said: “We continue to focus on improving efficiencies in our investment arrangements, which could lead to further cost savings.”

Alternative risk premia

Barr said that the scheme is “happy to retain external active managers where we feel that expected returns net of fees compensate us appropriately”.

However, he added that as a result of the fund’s focus on alternative risk premia in long-only equities, “we no longer have any traditional active equity manager exposure”.

Katherine Lynas, head of manager research at consultancy Punter Southall, said when opting for alternative risk premia funds, schemes should make sure they assess which strategy will work best.

“You have to decide which risk premium is the most efficient use of your assets under management during the economic cycle,” she said.

For smaller schemes, she said, it is important to have the expertise to "understand when to move and when to change the risk premia, or what mixture of risk premia make up the most appropriate exposure to the marketplace at a given time”.

Lynas noted there is a wide range of alternative risk premia funds. As long as the right one is chosen, she said, “it can be less expensive than going active”.

Christopher Binns, investment consultant at Barnett Waddingham, noted that one of the drivers of opting for this approach “would be that you are going to get returns that are better than market cap passive, but maybe not as good as a successful active manager”.

There are pooled funds available for alternative risk premia, he noted, which will be a "relatively cheap" way to access this strategy.

Cost-saving for smaller schemes

The Railways Pension Scheme has around £22.4bn in assets under management, but smaller pension funds can also employ some of these new strategies and cost-saving techniques.

Binns emphasised trustees should focus on value for money.

However, smaller schemes that wish to manage costs further and reduce fees, particularly if they want to stick to active management, “might consider investing via an investment platform” to have better purchasing power by combining assets with other investors, he said.

“With a small scheme you can’t really reduce external management,” Binns said. Instead, schemes can “focus on the governance side of things” to rationalise the number of managers used.

Ed Francis, head of investment for EMEA at consultancy Willis Towers Watson, said the main issue for many small pension funds is that investment costs are too high due to the lack of true buying power, while the administrative overheads for fund managers running their portfolios are also high.

He said: “What these schemes need more than anything is aggregation, the ability to pool their assets with others to drive both investment sophistication; the use of new investment techniques such as alternative risk premia strategies; and cost efficiency.”