The Merchant Navy Officers Pension Fund chief executive Andrew Waring tells Mark Dunne about the future of maritime pensions, journey plans, governance and his legacy.
The Merchant Navy Officers Pension Fund (MNOPF) was established in 1938, but when did you get involved?
I joined the MNOPF almost 10 years ago. At that point there were two sections to the fund: the ‘old section’ for pre-1978 benefits, and the ‘new section’ for post-1978. My job over the past 10 years has been to secure the benefits of these sections, move the MNOPF along its journey plan to full funding and introduce the next generation of maritime provision, the Ensign Retirement Plan.
One of my first tasks when I joined was to look at the old section of the MNOPF and understand how we could secure the pension benefits whilst reducing risk for the fund. The result was a series of buy-ins, then a buy-out of the old section, which was finally wound up in August 2014. The next step was to look at the new section of the fund as well as the defined contribution (DC) provision for the maritime industry.
In July 2015 we formally introduced the Ensign Retirement Plan, a DC master trust, open to any maritime employer, not just the merchant navy. A replica version of this was also inside the MNOPF to enable existing employers of the MNOPF to provide money purchase benefits for their employees.
In March 2016, we closed the MNOPF to future defined benefit (DB) accrual and at that point we separated out the money purchase assets and the DB assets. We therefore once again have two sections: A defined benefit section, which is the MNOPF, and a money purchase section, which is the Ensign Retirement Plan. So, the defined benefit section is on a journey plan to full funding by 2025. This journey is likely to feature buy-ins, buy-outs and ultimately a wind up of the fund.
The MNOPF is currently around 85% funded on a gilts basis, with the target being 103% funded on a gilts basis by 2025. We did not declare a new deficit at the last valuation and we are not expecting a deficit at the next valuation in March next year, all else being equal, so the MNOPF is doing pretty well.
That’s interesting. Reports show that most funds are in deficit, so what makes you think that you are going to avoid that?
We have had some big deficits in the past, but we adopted an innovative fiduciary management approach to investment back in 2010. Willis Towers Watson is our delegated CIO (DCIO), and with them, one of the first areas we tackled was the amount of hedging that we could undertake. Since 2010 we have significantly increased our liability hedging, so whereas a lot of funds have had pain from interest rates dropping and the value of their liabilities going through the roof, the MNOPF hasn’t suffered.
When I took over the new section back in 2009 it was about 61% funded and has been on the up ever since. Even though liabilities have gone up, our assets have gone up by more because of the hedging we’ve put in place. We have a good strategy; lots of hedging and the funds are well diversified, which has worked really well.
The flip side is that when asset values go up, the strategy doesn’t work quite so well. Diversification is a defensive strategy and given the demographics of our fund, we have deliberately followed this diversified, defensive approach. Two-thirds of the portfolio is liability matched and one-third is return seeking. All our interest rate and inflation exposure is pretty much hedged, as is half of our longevity exposure.
So our success is down to a combination of lots of things, but we have been pleased to see our funding level increase while most funds have seen theirs go in the other direction.
What process did you go through when hiring Willis Towers Watson as DCIO?
When I joined the fund there were the remnants of an in-house investment team, with Willis Towers Watson doing the advisory side. Performance wasn’t great. My background is asset management, so this is my home turf. I sat in on a couple of investment meetings, looked around the room and asked who was responsible for the investment performance. The chair of the investment committee looked at Willis Towers Watson and Willis Towers Watson looked at my investment director and he looked back at the chair of the investment committee. No one owned it, which was not very good. The fund had outsourced its investments, but not totally. Someone internally thought that they were running the show but they weren’t really, so there was confusion in the process and a lack of accountability.
We therefore changed to a fiduciary model and developed the concept of a DCIO. I introduced that model to the trustee that summer and they decided to adopt it, which meant that overnight we had to extinguish our in-house capability and appoint an external delegated CIO. So, we asked ourselves the questions: can we do it ourselves? Do we have to appoint another party? In my view, at £3bn under management the MNOPF wasn’t big enough to have an in-house capability. It needed to be at least £5bn to £6bn for us to do that.
So, the decision was taken to outsource it. Willis Towers Watson had been the investment adviser for around 20 years so step one was to appoint them as DCIO overnight. They understood the fund and they understood our existing managers because they appointed most of them. Crucially, however, they knew that we were going to undertake a full review of the role within the first 12 months.
Having appointed them in October we then appointed KPMG to undertake a review of the fiduciary market. That review confirmed 12 months later that Willis Towers Watson was the best choice for us, so they were formally appointed and have been advising us ever since.
Hymans Robertson oversees the performance of the DCIO as an independent investment adviser. It’s important to have this check and balance because the DCIO is a powerful position. Willis Towers Watson works with the trustee on an advisory basis in terms of risk allocation, strategy and strategic asset allocation, all on an advisory basis. When it comes to implementing the investment strategy they have full delegated responsibility. They therefore, hire managers, negotiate contracts, negotiate fees, sign the IMAs as an agent of the trustee, albeit in the trustee’s name, and then they report back, so there is an advisory relationship and a delegated relationship. The MNOPF Executive oversees the whole governance arrangement.