CASE STUDY: David Blackman investigates how delegating has worked out at the supermarket giant
Many blue chip companies like to flaunt their corporate credentials with lavishly appointed glass and steel entrances.
However, Asda’s Leeds headquarters strikes a less pretentious tone. With its portico entrance, the building looks like a slightly out-of-scale version of the ‘big box’ stores that the retailer has rolled out across the UK throughout the past 20 years.
Further reflecting the store’s ‘no frills’ ethos, visitors have to check themselves into the building easyJet-style.
I’m up in Leeds to find out about the company’s pension scheme, which is marking the fifth anniversary of embracing fiduciary management this year, while also becoming one of the first to undergo auto-enrolment.
First, though, we discuss how Asda became one of the first big UK schemes to opt for fiduciary management in May 2009. Asda initially allocated 20% of its assets to its delegated manager, which equated to £180m at the time. Over the past five years, the share of assets under this delegated management arrangement has increased to 30%.
They have done pretty much what they said they would do
That, combined with the general growth in the market over the past five years, means that the £180m initial allocation has nearly tripled to more than £500m today.
It wasn’t entirely plain sailing in the early days, the scheme’s chair Richard Phillips (pictured) recalls, as it took the Dutch-headquartered company about nine months to fully invest the scheme’s assets. But the arrangement has paid off, he believes.
“Having looked at their performance over the last five years they have done pretty much what they said they would do. They said they would introduce a lot less volatility and they really have.”
The big plus point from fiduciary management has been the lower volatility Cardano has delivered
As Cardano also looks after Asda’s advised section, the scheme provides a useful test tube for comparing the fiduciary management with the more traditional approach to investment. Since 2009 the delegated section has outperformed the advised part of the portfolio by 2% per annum.
“They haven’t performed above their benchmark as much as they expected to but they have beaten it and the volatility around that benchmark has been relatively small,” says Phillips, who is also director of corporate finance at the company.
Cardano’s approach, which has been to invest in diverse assets, including hedge funds, has paid off for both the advised and delegated sections.
The performance of the hedged assets in the advised section means that they have created a hard benchmark to beat, argues Cardano client director Phil Page.
If you look at their performance it’s like an index linked gilt with 2-3% better performance
However, from Asda’s perspective, the big plus point from fiduciary management has been the lower volatility Cardano has delivered. Page says that the funding volatility on the delegated section has been between a quarter and a third lower than that on the advised portion. “The key benefit is lower volatility and a smoother ride,” says Page.
Phillips agrees: “They take out inflation and interest rate risk. If you look at their performance it’s like an index linked gilt with 2-3% better performance.”
This lower volatility has been reassuring for the scheme’s sponsor, Asda. Page says: “The idea that they were getting advice from close to the market gave comfort to Asda: they have seen the benefi ts of more predictable, controlled performance. They have been behind moves to get more diversifi cation and hedging.”
Fiduciary management has also delivered on its promise of more nimble decision-making, says Phillips. As an example, he points to Cardano’s identification of a credit opportunity, which delivered its expected return in 14 months, less than half the time it was expected to.
They also knew when to get out, switching to another manager, thus enabling the scheme to bank the gains before the risk of underperformance. Phillips says: “They were also able to say 14 months later that the assets were now valued close to what they were really worth, and there were better opportunities elsewhere.”
In addition, fiduciary management has enabled the Asda trustees to invest in a much wider range of assets.
Pre-fiduciary management, more than 80% of the scheme’s assets were invested in equities.
“Our return seeking assets were essentially equities, we dabbled in a bit of private equity and we had a very quick crack at currency,” says Steve Jones, the scheme’s manager. The experience of fiduciary management has also influenced the make-up of the advised section, which was a surprise for Phillips.
We have diversified what we have invested in the advisory section
“When we put Cardano in charge of the advised section we didn’t think they would be that different from a conventional adviser.
“We have diversified what we have invested in the advisory section. They have taken some of their best ideas from the delegated section and sometimes given us a simplifi ed form of it.”
Reflecting the shift, equities now account for less than 40% of total assets under management with credit and alternatives accounting for 13% apiece, 7% in property and just under 30% in fixed income (see box).
The trustees have had the added comfort of advice from KPMG, as part of its wider service to Asda. Although KPMG advises the scheme’s sponsor, they participate in the investment sub-committee before it considers any recommendations from Cardano. To keep the information channels open, Cardano and KPMG usually communicate by telephone before the committee meeting.
The advisers don’t have a bun fight over who is cleverest
“The advisers don’t have a bun fight over who is cleverest,” says Page.
But doesn’t handing over responsibility for investment decisions mean that the trustees become de-skilled?
Phillips has been surprised that the opposite has happened. He says: “Our trustees are more informed investment wise than they were probably before.”
There’s never been a moment when I thought that it was not a sensible decision
However it doesn’t always mean swallowing the fiduciary manager’s advice whole, says Phillips, who recalls one occasion when the trustees disagreed over the choice of an equity manager.
In this instance, Cardano came around to the trustees’ thinking. But Phillips was always confident that Cardano had the right approach. “There’s never been a moment when I thought that it was not a sensible decision.”
For Steve Jones and his team, the office became a second home in the year running up to the company’s auto-enrolment staging date.
Asda scheme chair Richard Phillips estimates that they came into the office 40 weekends in a row. Hardly surprising when you learn that Asda’s 10-strong pensions team now serves 100,000 members.
If somebody had thought about it practically they would not have made it as complicated as they did
And auto-enrolment turned out to be more difficult to implement than initially envisaged.
“If somebody had thought about it practically they would not have made it as complicated as they did,” says Phillips. But the hard work paid off, with the supermarket giant reporting an opt-out rate of just 8%. The initiative has more than doubled the membership. This also meant a change of provider as Prudential weren’t keen to take on so many newly enrolled, low-paid workers.
If it’s right for the DB scheme it ought to be right for the colleagues in the DC scheme
“We saw this as an opportunity to try to get everybody at least in the same scheme,” says Phillips. Jones says that Asda were impressed by Nest’s offer, but were put off by the regulatory restrictions surrounding the scheme. From a relatively small pool of providers, Asda chose Legal & General.
The next step was to look at the default fund.
“It’s now split 50% equities and diversified growth,” says Phillips. “We were diversifying in the DB (defined benefit) scheme and we thought: if it’s right for the DB scheme it ought to be right for the colleagues in the DC scheme, But, he adds, diversification is harder within the DC context, because it entails greater active management, which brings costs, a potentially harder sell to members who bear the investment risk themselves.