Investor Profile

BT Pension offers innovative solutions for UK funds battling value leakage

BT Pension Scheme Management, the executive arm of the £47 billion ($59.8 billion) BT Pension Scheme (BTPS), believes it has a solution for the United Kingdom’s mature defined benefit pension schemes, buffeted by complex investment risks and dependent on external support from a fragmented landscape of service providers.

Under its new name Brightwell, and in a model visible in regions like Canada, other institutions can now tap into BTPS’ investment expertise and manager relationships in a mutually beneficial partnership that will also boost assets under management as BTPS continues on its own de-risking journey.

The £1 billion DB arm of the EE Pension Scheme has already signed up and Morten Nilsson, Brightwell’s chief executive officer, notes steady enthusiasm since the April launch.

Perhaps Brightwell’s most compelling service comes in its promise of a coherent, single approach to pension management. Schemes will be able to replace a noisy cohort of actuarial, investment, fiduciary and covenant advisors, plus multiple asset managers, with a single operation.

“We think holistically, and Brightwell can bring all this together under one roof,” he says. “At BTPS we start from our funded position and work through to our liabilities and our covenant and our investment strategy, bringing it all together.”

Nilsson believes multiple service providers create value leakage that is detrimental to pension funds, and although many fiduciary and asset managers argue they are selling solutions they are mostly focused on pushing products.

“There is an acknowledgement from all our peers of the need for something different,” he says. “The challenge is trying to offer something different in a way that the market understands.”

Reducing managers is central to Brightwell’s approach and has been a key seam of strategy at BTPS over the years where the fund has deliberately consolidated its managers into fewer, deeper relationships. These relationships can now be used to offer deals and investment opportunities to others, he says.

Multiple relationships leave many funds struggling to get value for money from their managers and risks pension funds having mandates that are not fully aligned with what they are trying to achieve, he continues.

Nilsson won’t be drawn on Brightwell’s target for assets under management, insisting it is not a volume game. Rather, Brightwell’s guiding rationale is persuading pension funds to work together rather than go through intermediaries and tap into the operational benefits that come with sharing resources.

“This is an opportunity to see how we can work with like minded schemes and find solutions,” he says. “We live in very uncertain times where DB funds need to manage their journey plans. Most schemes are in their end game discussions about what they are trying to achieve.”


Nilsson also believes that Brightwell offers a compelling solution for corporates. Under a buyout model, de-risking DB funds offload tens of billions of pounds of liabilities to insurers who promise to pay employees’ retirement payments at a fixed level.

As schemes seek to complete a transaction with an insurer, they move out of riskier assets such as equities and into bonds.

Nilsson says a buyout is not an option for BTPS given the fund’s size, and capacity in the market. But he also believes corporate sponsors risk losing money in this kind of transaction. He questions the rationale of such large value transfers of returns and surplus from a pension scheme to an insurance company when pension funds could stay in control, benefiting their sponsor.

“A buyout is expected to lead to double digit returns for insurance companies. Buyouts also mean you are taking money away from sponsors that could otherwise be invested in the UK economy – or wherever they operate.”

In a reflection of employers’ concerns that the surplus will be trapped in schemes as funding levels improve, Brightwell has set up a vehicle whereby a pension surplus can be given back to the corporate sponsor.


Brightwell won’t pool or merge client fund assets like the LGPS model and the team will work with different trustee boards. The DB section of the EE Pension Scheme has outsourced its CIO function, but Nilsson says a larger scheme might equally benefit from having its own CIO and internal team.

Either way, client funds will be able to tap into BTPS’ own investment office in a virtual extension of their own team, accessing Brightwell’s expertise to find the best solutions, design mandates, select managers and implement strategy.

Brightwell will approach investment through the lens of understanding client funds’ funding position, liabilities, how longevity hedging fits with investment strategy and the best way to lock down cash flows on that journey, tailored and specific to them but which will also reveal alignment between BTPS’ objectives.

Cash flows

Brightwell will pay particular attention to how client funds can maximize and lock in cash flows better, providing certainty on what flows they are trying to match. Part of this involves ensuring funds tap a healthy illiquidity premium for their illiquid assets (an allocation which, for many pension funds, has growth relative to their size since last year) and are able to sell illiquid assets in the secondary market.

“Depending on their cash flows, the asset mix for many DB funds has become more illiquid and this is now a central focus area,” he says.

The UK government is banging the drum for pension funds to invest more domestically, but Nilsson says BTPS is already heavily invested in the UK – and wants to be. Closed DB schemes will never want to hold large amounts of local venture investments because it doesn’t fit with their maturity profile but BTPS offsets this by increasing exposure to the UK through investments in corporate credit, direct lending, infrastructure, and income generating property.

“DB and DC funds are different,” he continues. “If you are a 20-year-old saver in a DC scheme you have lots of capacity for risk and should grab it, but the DB sector is different. The government is eyeing trillions of pounds in DB schemes to invest at home. We have appetite to invest in income generating local assets, but high risk illiquid investments wouldn’t suit these schemes.”

Brightwell will also help client funds invest in the transition, supported by BTPS’s expertise where prize transition assets include King’s Cross station, “a brown asset that is now net zero and has also made a tonne of money.”

“UK pension funds also hold a lot of gilts. If the government transitions and helps pension funds achieve their net zero goals with the right return that is perfect,” he concludes.


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