Analysis: BT’s plans to review pension scheme raises questions over Hermes’ future

Observers see growing divergence between BTPS and its in-house fund manager

Plans by British Telecom (BT) to potentially close its ‘gold-plated’ pension scheme to current members has once again shone the spotlight on companies grappling with large pension deficits and mounting costs, while also raising questions over the future of Hermes Investment Management, the ESG-focused fund firm fully owned by the BT Pension Scheme (BTPS).
Industry experts said BT’s plans, which could see it close down its defined benefit (DB) scheme to existing members, highlights the growing divergence between the fund, one of the UK’s biggest, and Hermes.

BT is the latest in the long line of British companies closing down or looking to close down their expensive DB offering to existing members. Last month, it said it would review pension arrangements for BTPS, a move which could see the scheme close its final salary agreements to current employees. The scheme has been closed to new entrants since 2001.
BTPS’ deficit stood at £7bn in 2014, but low interest rates and increasing life expectancy are expected to push the deficit figure higher when it carries out its triennial valuation this year. BT said it had made pension deficit payments of £274m in 2016, compared to £880m in the previous year.
BTPS itself has had to inject £10m into Hermes to shore up its underfunded pension scheme.
One senior industry source who declined to be named said: “BTPS has been steadily moving assets away from Hermes. It is a maturing fund and, as the fund continues to mature, their needs will differ to what Hermes has to offer. So there is a growing incompatibility between what BTPS wants and what Hermes has to offer, and this is only going to continue to the point where won’t make sense for Hermes to manage BTPS’ assets.”
The person added: “It is fairly well-known in the industry that Chief Executive Saker Nusseibeh has been looking for a buyer for Hermes.
“This plan to close down the DB scheme to existing members may not change anything, but I suspect Nusseibeh will continue to focus on trying to find a buyer for Hermes.”

In May, according to a filing at Companies House, BT Pension Scheme Trustees Ltd. changed its registered address from the Portsoken Street HQ of Hermes to One America Square a few streets away. A BT spokesperson confirmed it had moved to a “scheme-owned building”. As RI reported last month, Daniel Ingram’s role as Head of Responsible Investment at BTPS is not being directly replaced.Assets managed by Hermes for BTPS fell to £14bn in 2016 from £22bn in 2014, while assets managed for third-party clients rose to £14.5bn in 2016 from £7.1bn in 2014.
The source added: “Every time BTPS moves assets out of Hermes, it gets very difficult for Hermes – they have to rearrange staff or in some cases, move people out of the business.”
At the end of 2015, BTPS pulled an £8.4bn government bonds mandate from Hermes – roughly one third of the fund firm’s assets at the time – in a bid to cut costs. In April 2016, Senior Portfolio Manager, Paul Syms, and Head of Sovereigns and Inflation-linked Bonds, Paul Oliver, who managed the mandate at Hermes, quit the firm.
Another senior industry figure said the current divergence between BTPS and Hermes was in “stark contrast” to the way some of the best schemes in the world were managing their assets.
“We are seeing pension funds such as CalPERS, CalSTRS and the Wellcome Trust all cutting down on external managers and moving their money in-house. In the UK, RailPen is a good example of this,” said the source, also on the condition of anonymity.
“What has clearly not worked for Hermes is BTPS keeping at arms length with its fund manager. It is essential for big pension funds to work out the best way to run their money, especially when it is so difficult for pension funds to be sure that their fund manager is on their side,” the person added.

Independent pensions consultant John Ralfe said BT’s plan to close its DB pension scheme to existing members was part of the overall trend of companies closing down their expensive and risky DB schemes.
“But BTPS will still be holding £50bn of assets to pay pensions already promised, so closing the scheme should make little or no difference to Hermes,” he said.
A spokeswoman at Hermes said that over the past five years, the firm had “transformed” itself from an “inwardly-focused” asset manager to a successful third-party business.
“This required a long-term vision and commitment from not only the Hermes board and Executive Committee but also from our owner, the BTPS, which agreed the growth plan in 2011,” she said.
She added: “Our share of third party revenue of 63.7%, as of 30 April 2017, highlights how successful this growth plan has been and the value we have returned to our owner. We will remain close collaborators with BTPS as we continue to develop a sustainable firm focused on creating long-term holistic returns for all stakeholders.”