All aboard the change express as Railpen leaves the station

At the end of a corporate review process that lasted eight months, involved 23 meetings of a steering committee and produced 60 working papers, the UK railways pension fund Railpen was left with 422 action items.

“We’ve done 224 of them,” Chris Hitchen, Railpen chief executive, told the Fiduciary Investors Symposium (FIS) at Harvard University.

“And I’ve got 74 to do before I go home for Christmas.”

The transformation embarked upon by Railpen to modernise its corporate structure, its remuneration structure and its investment processes “really was a soup-to-nuts change”, Hitchen said.

Railpen called on Roger Urwin, head of global content for Towers Watson to help define and then implement a change program.

“We together constructed this process,” Hitchen said. “We’re only part of the way through it. I wouldn’t say we are a finished item at all here, but we’re well on the way.

“We spent a surprising amount of time on [defining] why are we doing this? What are the mission and role of the organisation, revisiting our values and beliefs. That’s really, really important, so you get a common understanding of what it is we’re here for, a common sense of purpose.


“We spent quite a bit of time on the ‘enablers’: setting up the right governance processes, and thinking through what are the right competitive elements for your scheme, how can you go about solving the investment challenge.

“We now have an investment board which is majority externals to the trustee. My trustee is a representational board. We haven’t gone quite as far as Ontario Teachers, with their indirect representation, but we do now have independent experts in control of the governance. And they are as important in encouraging my team and introducing ideas as they are in judging what we produce.”

Hitchen said he was struck by remarks made at FIS by Randy Cohen, a senior lecturer at MIT Sloan School of Management, about “deconstructing alpha into its hidden betas”.

That’s really how we’re trying to construct our manager relationships going forward,” Hitchen said.

Railpen is a $30 billion scheme covering employees in the UK industry, which was nationalised in 1946 and denationalised again in 1994.

“That’s how we ended up with an industry-wide scheme,” Hitchen said.

“My scheme, because of its history, is sectionalised. We pool the assets but the liabilities are in different sections. I’m kind of 110 plans stuck together, in that sense.”


Hitchen said that over time the Railpen scheme had become more and more complex, with various functions outsourced and “more and more managers seeking more and more esoteric ways of adding value”, and had reached the limits of its corporate structure.

“It became apparent that the world had been changing faster on the outside – that Jack Welch thing – than we were on the inside…and we needed to do something else,” Hitchen said.

Tower Watson’s Urwin said that transformation change is always difficult, but Railpen had been committed from the outset to think differently, and to see it through.

He said Railpen had moved away from the traditional pay-for-performance structure, because these so-called “eat what you kill” approaches, while “superficially quite appealing, are culturally quite bad, because they produce a focus on short-term performance, they generate selfish behaviours too often, and they reinforce culture where blame happens too easily”.

“What I speak about here is the rejection of the eat-what-you-kill principle,” Urwin said.

“The process that Rail led here on the compensation review was a process that led to something that I call an eat-what-you-grow alternative.

“The design of that comp was based on a three-year bonus for the value-add that individuals had contributed to the team, but then deferred three years while it grows with the fund. So it’s a six-year deal, in two parts. Good rewards for good stewards.”


Urwin said the key to effective organisational chance was “about marshalling and motivating the teams; it’s about organisational design in particular, managing stakeholders and getting everyone to connect to this fast-changing landscape”.

“Governance has come a very long way in the last decade or two but it has a very long way still to go,” he said.

“My journey has been several years on this, working with a bunch of very large funds. I started out downunder, working on the New Zealand Super Fund, the Future Fund [in Australia] – the new kids on the block had the advantage of being fresh – and then trekked thought Abu Dhabi with ADIA, spent some time in California with CalPERS, and latterly some time with Railpen.”

Urwin said each of the funds he’s worked with has brought some original thinking to the issue of corporate change, but in each case, success has been down to the fact that the fund has been prepared to be adaptable.

“We know that change hurts, and big change hurts big,” Urwin said.

“But without change there is really no progress.

“The key dimension here is that transformational change is about far-reaching movement in structure, people and process, and the focus of an organisation and its ability to adapt. Better decisions equals better performance down the track, with a lag.

“Railpen was very ambitious to cover all the bases in this change process. Anything was possible.

“Really, transformational change is not that popular for the obvious reasons hat it’s a big time and energy commitment. And the risk is that it doesn’t live up to expectations.

“But to Railpen’s credit they took those risks on, and they’ve lived to tell the story.”