Governance changes give BP flexibility in investment decision making

The most recent investment review by the £13 billion ($20 billion) BP Pension Fund, completed last month, didn’t focus on altering investment allocations, rather it examined the way investment decisions are made at the fund. Chief executive, Sally Bridgeland spoke to Amanda White about the governance changes and the new flexibility around investments.

Defined benefit funds across the globe have made varied responses to the financial crisis including, but not limited to, more conservative asset allocations, revisiting passive investing, and increasing funding levels.

For the £13 billion ($20 billion) BP Pension Fund, the crisis didn’t raise any alarm bells about the way it was investing, with its portfolio beating the benchmark last year and remaining solvent on its own internal measures.

The fund is uniquely advantaged to weather the storm, with its employer-sponsor committed to making up any shortfall on a funding basis each year.

This provides the fund with somewhat of a crutch, but by no means has prevented the chief executive, trustee board and internal investment team from engaging in a dialogue around better investment methods, techniques and decision making.Sally Bridgeland

In fact for chief executive of the fund, Sally Bridgeland, the most important part of the recent investment review was to examine, and understand the detail of the sponsor’s role.

Bridgeland describes the operations of a pension scheme as an eternal triangle between the sponsor, the covenant, and investments. And it’s this unique and sensitive relationship that was explored in the most recent investment review.

‘We decided to stick with the same investment approach but we’ve made changes to the way we do things to reflect the past few years,” she said. “In the last few years we would have liked more flexibility around decision making and investments.”

However she is cautious that there be rigor in how that translates to the reliance put on the sponsor.

This has materialised in the investment principles statements, where previously most of the investment decisions were referred to the board, some of the detail has been taken out and given Bridgeland and the internal team of BP Investment Management (BPIM) more flexibility.

“We now retain the high level split between equities and bonds but within that we have more flexibility, to make decisions, and move allocations,” she said.

For example, she said throughout the crisis the fund’s analysis across the entire portfolio of stocks and bonds showed a high concentration of financial stocks, which internally became a concern, however neither the investment team nor Bridgeland were tasked to make adjustments.

“We are not tearing up the rule book, but we want to acknowledge flexibility.”

In addition the new flexibility will allow nuances in investment, such as recognising corporate bonds is not a homogeneous asset class but that different bonds, such as financial bonds, behave differently.

“That is my role to do that and not the active mangers,” Bridgeland said.

The discussion around changing the governance model was very collaborative, and was equally driven by the investment management arm and the in-house executive team under Bridgeland, and well received by the plan sponsor.

“We have had the same governance model for three years, and everyone was too comfortable and have slackened off. Now we are more about building confidence and trust in the decisions and the people,” she said, adding that a dash of cynicism and caution was important.

An example around this new decision making flexibility is examining the allocation to an opportunistic bucket.

“We have had the discussion around what would be in it if we do. Private equity was an opportunistic but now it’s an established asset class.”

Bridgeland is also keen to maintain a forward looking overview of the pension fund, and regularly engages with funds managers.

“One thing we do that others don’t seem to do, is I have conversations with funds managers and economic advisers about what’s on the horizon, not just looking backwards.”

The fund’s asset allocation has not changed significantly, with the post-review allocations including 65 per cent to equities, 10 per cent to private equity, 15 per cent to bonds, 5 to 6 per cent to property, and a bit of cash and gilt for liquidity.

“We have the flexibility to make asset allocation changes around the benchmark,” she said.

The assets are mostly managed inhouse, under chief executive of BPIM Anthony Pike, but some corporate bonds, small caps and private equity is outsourced.