Laura Blows speaks to Daniel Godfrey about his new role as chief executive of the Investment Management Association (IMA), along with its director of public policy, Jonathan Lipkin, about the changing nature of pension fund investment

How are you finding your new role?
Godfrey: It’s been really exciting for me actually. There is so much going on in the investment management sector and lots of opportunities for us at the IMA to make a positive difference.

In what way?
Godfrey: There are a number of pieces of regulation coming through multiple regulations that can affect a fund manager. For instance there are a number that concern remuneration and you don’t want to be applying several different rulebooks. We have a significant workload in the implementations on the AIFM directive. For example, if people have to fill in a 20 page form for each fund they manage, how can we help them do that more easily? We’re also looking at positive things we can do pro-actively. For instance can we play a role in helping asset managers exercise their stewardship responsibilities over the companies they have invested in more effectively, by helping them work together where appropriate?

So is stewardship to be a particular focus of yours in the short term?
Godfrey: It’s really hard to say that there is a particular focus as we have to focus on everything. There are a lot of plates spinning at the moment. Some of the positive things that I think we will be able to do will help to build trust in the industry, because it was not just banks that suffered, everyone in financial services has been pulled into a trust sinkhole in the last five years. Stewardship is a very fertile area where we can demonstrate that what we do is positive by exercising responsible ownership and demonstrating that we’re interested in the long term sustainable profitability of companies.

Will that be enough to restore trust in the financial sector?
Godfrey: No, I don’t think we can restore trust in the financial sector. Our focus is on what can be done to restore trust in asset management. The calamity in the wider financial sector dragged us in and helped to destroy trust. What we have to do is show that we are willing to work very hard all the time and always look at ways to improve. So for instance looking at how we think about managing assets over the longer term, the skills we apply to reduce the costs that are being incurred on behalf of customers when managing their portfolios while delivering returns, and the way we communicate to clients. I think the stewardship and engagement piece is one area where you can make a difference and it would be quite visible quite quickly, the biggest chunk of what we have control of in the industry is how we do our jobs. The IMA has £2.4 trillion worth of assets managed worldwide on behalf of UK institutional clients. Are you seeing any asset allocation changes from UK pension funds?

Lipkin: Post 2008 we have seen a strengthening international regulatory bias towards de-risking. But actually if you look at the UK over the last decade DB pension schemes have significantly derisked. Equity allocation has changed significantly and within that UK equity exposure has diminished very strongly, so you now have a smaller overall equity exposure but within that pot greater overseas exposure. Over the last five years emerging markets have been a stronger part of this. So that’s the broad picture. It leaves pension schemes in quite an interesting position right now, because not only have some been derisking but some have been moving to very specific liability matching strategies such as LDI. We’ve seen LDI mandates grow very strongly, reaching about £320 billion by the end of 2011. But that trend has also been challenged by a low interest rate environment. I think pension schemes right now are faced with a very difficult set of decisions because you have a low return low interest rate environment.

Godfrey: The concern is the risk of pro cyclicality of the regulatory imperatives. So you find that you’re being forced to reduce equity holdings when equities are cheap because of the directives that have been put down, and you’re being forced into gilts when they are at record low yields. And given how long term the liabilities are of pensions, they do not need liquidity in their asset holdings but they do want a certain risk profile, so you wonder how well served pensioners are being by this. Would you say that pension fund trustees are becoming more savvy investors, with the increasingly complex investment and regulatory environment?

Godfrey: Standards of knowledge and education amongst trustees since Paul Myners did his original review (Institutional Investment in the United Kingdom: A Review, 2001) has definitely improved. They have access to some quite savvy and sophisticated advice. So I think the short answer is ‘yes’. And even though smaller schemes can’t afford that sort of advice, I’m sure their trustees take their responsibilities very seriously. I have met with representatives from some of the very big pension funds and they have some very high quality resources looking at stewardship and governance. They feel that it’s their responsibility to do this. A lot of the pension schemes are really committed to it. They believe that as well as getting better returns, it’s their moral obligation as stewards of the money to do it properly.

On the DC side, how is auto-enrolment affecting the structure of default funds?
Lipkin: Governance is going to emerge as the number one issue for DC, both contract and trust based. And that’s partly because the DC market is starting to come to maturity, but of course it’s primarily because we are about to enrol people into DC schemes who otherwise might not have chosen to have an investment product. As they may not feel comfortable with exercising choice and taking risk, governance becomes critical as you are deciding default strategies that as far as possible meet people’s needs. This is a significant work in progress.

Finally Daniel, what do you wish to achieve during your time as chief exec?
Godfrey: To ensure investment managers are in the best position to do a great job for their clients. That broadly means, constantly thinking about and improving the way we manage portfolios, manage the administration of funds and manage communications with and disclosure to our clients and consumers. It means having a regulatory regime that properly protects our clients but which is also cost effective and simple to follow so that managers can devote as much time as possible to managing. And we want to build consumer understanding of the need to save, the value of investment management and trust in investment managers. When I leave here I hope the IMA has built trust in the industry and that the industry is recognised for its commitment to constant improvement.
I would like to feel that the industry and the IMA have been able to work together to achieve this. I would like to think that the IMA would be seen by regulators, politicians and the media as a trusted partner and not an adversary. Personally, what I would like is to feel that I have worked with some great people and that we have had fun together.

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