Analysis: Hermes and the BT Pension Scheme – is this the endgame?

It was back in June that Responsible Investor first looked at how plans by British Telecom (BT) to potentially close its pension scheme would impact Hermes Investment Management, the ESG-focused fund firm that is owned by the BT Pension Scheme (BTPS).

We quoted a senior industry source as saying it was fairly well-known in the industry that Hermes Chief Executive Saker Nusseibeh had been looking for a buyer for the firm, which has £30.8bn in assets.

And we also quoted another senior figure with knowledge of the situation as saying the ‘arms length’ relationship between Hermes and BTPS had not worked.

Hermes is a cornerstone of the corporate governance space. Its Hermes Principles on shareholder-company engagement date back in 2002 and helped to set the stage for the development of the broader ESG space such as the foundation of the Principles for Responsible Investment. Both Hermes and the BTPS were founding PRI signatories in April 2006 and BTPS Trustee Director Donald MacDonald was the inaugural chair of the PRI. So it’s fair to call BTPS and Hermes ‘systemically important’ ESG investors and a de-coupling would be a significant event.

So a new Bloomberg story saying BTPS is considering a potential sale of Hermes should be seen in that context. Hermes has declined to comment to RI today, calling it market rumour.

My feeling is that we should be very wary of assuming that where there is smoke there is fire.

Since our article this summer, which pointed out that the BTPS and Hermes had ceased to share the same office address, a few things have happened.

For a start BT is, according to the Financial Times, planning to close its defined benefit pension scheme to 11,000 of its managers amid a £14bn deficit.

And it has floated the idea of a European domicile for fund sales given the UK’s withdrawal from the European Union.And RI can reveal that earlier this month the Hermes board enacted a special resolution to reduce its share capital by cancelling 707 shares (worth £707). Under UK company law, Hermes had to file a statement of solvency as part of this process (Hermes’ Companies House filings are available here).

This could be just routine housekeeping of Hermes’ share register, but experts say the solvency statement route possibly “could be used effectively to unlock capital reserves no longer required for a company’s operation, for instance on the sale of key assets”.

Speaking to RI earlier this month, one senior figure within the institutional space in the UK said the model of listed corporates setting up their own asset management firms “is now viewed as somewhat flawed”. The person went on to say that, however, this structure “does allow BT to potentially separate and shed its pension liabilities” to the likes of DB pension insurer Pension Insurance Corporation.

RI spoke with Nusseibeh earlier this week on another matter and he said Hermes would retain its responsible investment stance regardless of any changes at BTPS.

BTPS itself has had to inject £10m into Hermes to shore up its underfunded pension scheme and it has been steadily moving assets away from Hermes.

Hermes says it has transformed itself from an “inwardly-focused” asset manager to a successful third-party business. Almost 64% of its revenue now comes from third parties.

Whether or not we are entering the end game of the BT Pension Scheme’s involvement with Hermes, fundamental change at two of the building blocks of the responsible investment ‘movement’ seems even more likely given recent developments.