Scale, Strategy, and Stewardship: Rachel Elwell, CEO, on Border to Coast’s Growing Power in UK Pensions

0:00The value from active management on fixed income comes from really understanding what are your risks when it goes wrong. We've had a very benign credit environment for several decades now and I think sometimes people forget that it's not a free lunch. And so I think passive for fixed income needs a lot more thought. The LGPS is still heavily invested in the UK, so about 30 % of the LGPS is invested in the UK in different asset classes, which given that the LGPS is about 400 billion is quite a lot of money. We invest in UK real estate, some index link gilts, UK equities, UK credit. We have, over the last few years in particular, started to really work with our partner funds to focus on investing in the UK in private markets.

0:56Rachel Elwell:As we learned from our interviews with Ontario Teachers and the Australia Future Fund, the consolidation of pension assets into sizable pools can offer scale, access and reach, as well as much needed capital for the domestic economy. They offer the potential to act with a very long-term horizon as long-term true asset owners and to unlock investment opportunities that individual funds might struggle to access alone. Today in the UK, one of the most consequential organizations in UK pensions is Border to Coast. They sit at the center of one of the most significant shifts in UK institutional investing in a generation and oversee over 100 billion of local authority assets.

1:38Rachel Elwell:To understand the investment approach, the motivation, the challenges and the opportunities such scale bring, we're delighted to welcome Rachel Alwell, CEO of Border to Coast. Rachel, it's taken us nearly a year to pin you down, but you're here. Welcome. Thank you. It's brilliant to be here. I'm really looking forward to it. Great. Well, let's start with you. Cambridge, maths and statistics, 93 to 97. My wife, who studied maths over in Oxford, says that when she mentions this at drinks parties, people tend to move away. Was it a good choice? Oh, brilliant question. I had a fantastic time in Cambridge.

2:13I met some brilliant people who were lifelong friends and got parents to my children. um for me that was uh something i think when i was at the age of three i asked where my dad went to university and he said pembroke college and i um decided that that's where i was going before i even knew anything about cambridge which probably tells you um i'm a bit of a daddy's girl but but also um you know pembroke didn't allow women in until 1986 so they actually had their 10 year anniversary of letting women in. So I was still confidently saying I was going to Pembroke when actually it wasn't even possible.

2:56So maybe that also says something about, I like to set myself a goal and really go for it. I was very fortunate to come from a loving family who believed in the importance of education. My parents were teachers, my grandparents were a combination of teachers and uh managing um or station master for one of the local railway stations uh and i think that really gave me a sense of having had that start how important it was to do something with that um and i think that probably then links on to some of the things that I did in my later career and what I do now.

3:39Rachel Elwell:So let's look at your career, which at the moment appears to have been in three stages, 15 years at PwC, Royal London for six years and eight years so far, a CEO of Border to Coast. Let's just start with PwC because big organization, you tend to get streamed into different things. How early were you assigned to financial services and why? So when I was at sixth form, I did one of those questionnaires, you know, it's like, what should you do? And it came back with engineering, teaching, or being an actuary. And I'm not very good at building things. People don't allow me to do that. So engineering was never going to work.

4:23my parents fairly early on told me that um I probably didn't have the patience to be a good teacher so that left I didn't even know what an actuary was so I um when I was at university I wrote to a number of actuarial firms and said I don't know what an actuary is would you maybe let me have some summer work so I can find out and PwC uh saw something in that letter I was their first actuarial summer student and they were you know fortunate I they offered me a job after that um I guess the great thing about joining well it was PWU at the time was that they were not a traditional actuarial consultancy they were still growing and so one of the first things that I did was working with the then FSA on the pensions review and um looking at how should that be structured.

5:15And that kind of led me then into doing all sorts of different things with PwC across all industries. I worked heavily with transaction services, working with private equity firms. I was a scheme actuary for Tetley Tea. But I think increasingly got involved in doing new things. So when the pensions regulator was brought in, I was very involved in working out how you thought about those moral hazard clauses in doing a deal, for example. I then had some maternity leaves and by this stage, I'd moved back up home to Yorkshire.

5:59And coming back from that, I thought, actually, what do I want to do next? And I'd been there by that stage, if you include my summer student, well, for 17 years. But I'd been through so many different phases of my career, even though I'd been there that long. Every three, four years, I was doing something different. I think probably the highlight of my years at PwC was I was seconded to the Russian government and worked with them on their pension reform. That was just after I'd qualified as an actuary. So I was out there for about eight months. And that was absolutely fascinating. but just really gave me that sense of how you go into a totally alien situation and apply what you know work with the people there and bring that together right and so the royal

6:51Rachel Elwell:lantern which was the stint in between what was it that that you thought was going to give you didn't have uh so part and this maybe is you know another part of the story for me um is the people that you meet as you are working. So the story with Royal London was I was looking about what the next stage of my career would be. And I'd been working with the then FD at Royal London and really enjoyed the relationship that I had with him. And this was at a time when Royal London were very acquisitive and were looking to consolidate the mutual insurance industry. and he invited me to come and help him to do that with the pension schemes.

7:34So I went across to Royal London. I set up their pensions team on the staff pension side. But then that led to other things. So I set up the group treasury function. I established the investment office. And so I was the person at the insurance company who was the biggest client for Roland and asset management business at that time. And I think having people who see something and give you the opportunity and the support to do that has been a really important theme, both for me personally, but then I hope how I want to work with other people.

8:19Rachel Elwell:Schroeder's Capital is the private markets division of Schroeder's, combining the experience of specialized local teams with the scale, rigor and resources of a global institutional platform. Schroeder's Capital provides its clients with global access to differentiated and specialized strategies encompassing all private markets asset classes, from private equity to real estate, infrastructure and the broad universe of private debt and credit alternatives. This approach enables Schroder's Capital to access opportunities and investments that are often difficult to find elsewhere, while also having the broad capabilities and perspectives needed to build holistic solutions and deliver tailored outcomes across private markets for both institutional and wealth clients.

9:06Rachel Elwell:Discover more at schroderscapital.com. Remember, capital is at risk with investing. IFM Investors is a global asset manager, founded and owned by pension funds with capabilities in infrastructure equity and debt, private equity, private credit and listed equities. They believe healthy returns depend on healthy economic, environmental and social systems and these are evolving on a scale never experienced before. To find opportunity, build value and meet the needs of future generations you need scale, skill and expertise. That's what IFM Investors has built up over 30 years. Which brings us to your role as CEO of Border to Coast.

9:51Rachel Elwell:Huge job, huge challenge. Can we start with the description of why it's been created and what it is today? So local government pension scheme, when you think about it as a whole, is one of the largest pension schemes globally. It's in the top 10, and depending on what's happening with market prices, possibly top six. When we think about how it's administered across the whole of the UK, there are over 100 administering authorities, each managing that in small or large individual schemes administering the same benefit structure. But you have from the Isle of Wight, which is under a billion of assets under management sterling, to Greater Manchester Pension Fund, which is over 30 billion.

10:46And so about 12 years ago, then Chancellor George Osborne talked about how can we harness this scale in a different way. So he said to the LGPS in England and Wales, go away and create half a dozen asset pools. At the time, they were referred to as sovereign wealth funds, but clearly they're not. They are pension funds. And their purpose is to make sure that the investments that are needed to support the benefits within the local government pension scheme can be run well. and that we can harness the benefits of scale. Even back then, over 10 years ago, part of that policy intent was how can we work with these large asset owners to invest into infrastructure in the UK?

11:39So that's, I think, always been a thread through the last decade. Obviously, in the last few years, that's become more prominent again, just like it has for the whole of that asset owner in the UK. I think at the heart of this, the local government pension scheme has nearly 7 million members. The average member is a 47-year-old woman working part-time earning£19 ,000. The average pension is about£5 ,000 a year. And I think for the UK, it's serving a number of different policy initiatives. the most important of which is for low earners it's providing a secure income incredibly cost effectively so it costs um less than half of what it would if we were trying to provide this through defined contribution plan partly because you can pull the investment risk and the and the life mortality risk.

12:44And I think that is sometimes we can get wrapped up in, is defined benefit a good thing or a bad thing? But actually, if you look at that in the system in the UK, the LGPS does that very, very well. I think the other bit that we sometimes miss is that income is the difference for these individuals between having provided for their own and contributed to their own retirement versus it being means tested. And there's plenty of information out there about what that means psychologically for people, that they've made their own security. Right, right. So I think for me, going back to when I was growing up and what I found important, the great thing about Border to Coast is that it has that purpose that is really important for the individuals, for local communities, for taxpayers, whilst also being really fascinating intellectually and allowing me to grow and develop and do new things within our industry.

13:57Okay.

13:58Rachel Elwell:So purpose is clear. Economic logic is clear. Let's move to the investment equation. the most difficult question they say are the simplest ones. Is there a single unifying investment objective? So I talked about there being over 100 administrative authorities, and they all have different investment beliefs, risk appetites. They're starting from different places. Some of them are well-funded. Others are still looking for that investment return to be above 100%, although the recent valuation, the LGPS is more than 100 % funded on the whole. And the vast majority of those administering authorities have funds that are more than 100 % funded.

14:46So what that means in reality is we have, or will have from the 1st of April, with the consolidation that we've seen just recently, 18 of these pension funds who we are providing investment services to. And each of those 18 have their own investment beliefs and objectives. Part of our job is to work with them to help make sure that they are clearly articulated and then to provide advice on how they might invest to support their objectives in line with their beliefs.

15:23Rachel Elwell:So in investment parlance, does that make the investment advisor, not the investment manager? Well, we do both. And actually, when I say we do both, we will do both because this is a big part of the recent changes. So historically, when we first started pooling, we had just the investment implementation part of that process. So that meant if we go back to eight years ago, we were working very hard, small team in Leeds, looking to create a regulated asset manager. We went live at the end of June 2018 with the first transition of assets of about 10 billion to manage equities in-house, both UK and overseas developed markets.

16:14And the journey from then has been to build out those capabilities. A couple of years ago, we knew that we were coming towards the end of building those capabilities. So we worked with those partner funds to say, what do you want us to do next? Next, you've built and you've had the vision to build this center of expertise in Leeds with in-house investment management expertise, as well as partnering with external managers. What do you want us to do next? And that ended in our 2030 strategy, which thinks about the funds as being holistic. partner fund pensions committees set the strategy and the risk return appetite border to coast implements that we have investment reporting that enables the funds to oversee but importantly to feed back into how they set the strategy we've got strong oversight and governance in place as you would expect and then making sure that in any system only being as strong as its weakest link that everybody really understands and their role is valued in that system.

17:32And so we agreed this strategy and what we needed to build that was signed off by our shareholders who are our partner funds in August, 2024. And then in November, 2024, the government launched their LGPS fit for the future consultation, which took our 2030 strategy to needing to be delivered by April, 2026. So in April, by April, 2026, the key elements of that system will by and large be in place.

18:06Rachel Elwell:And merging disparate pools of capital is a challenge that investment organizations face, you know, when they go through change, give us some practical illustrations of both the challenges and where you've learned how to do this better. So I think going back to, maybe that comes back to why did I take the job? And I suppose the first one of these, I talked about really enjoying creating things. And this is such a brilliant opportunity to create something that is meaningful in Leeds, which is where I'm from, or at least I should say I'm from Sheffield, which is very important for those people who are from Yorkshire to make that distinction.

18:54But I grew up near Leeds. So being able to contribute to what's already a very strong financial services economy with building an investment manager in Leeds was really intellectually challenging and also close to my heart. But I suppose historically, my leadership roles have probably been more technical. And I think what was really interesting about this role on top of all of the other things I've just talked about is the chance to work with people who don't have to do something and don't necessarily want to do it. And how do you create an environment where people feel ownership of what's being created and feel that they have a really strong voice in what's being created and, I hope, feel proud of what's being created?

19:43So that might sound like a very long-winded answer to, again, what might be a simple question. originally bringing together the 11. They'd already decided that they wanted to work together and that meant that I could come in and talk to them about facilitating that. And I think there's some really important themes when you're pooling. One of those is what's the cost of compromise? So if partners come into that very fixed on what they already have and all of the detail of it it's almost impossible to pull so really working hard on uh how different are you to another partner if we put those things together we can get these benefits of scale and actually the compromise isn't big so we had a I'll give you an example just to bring to life, I hope.

20:48Investment grade credit, an asset class very close to my heart, partly because I'm very good at it. And so I got a brilliant opportunity to work with that team when I was there. We had this really fascinating discussion about whether there is a difference between buy and maintain and low turnover active on investment grade credit. And when you really get down to it, they're not that different. particularly in a vehicle that's pooled where the pension schemes are continuing to put money in. But the terminology of that had really grabbed people's attention. So we had to work on what do we really mean by these things, these phrases that people are using?

21:34And how do you get people to see that actually they're really not that different? Here's the benefit that you get if you come together.

21:40Rachel Elwell:Can you just break those two? because actually, as you said that, and I think I understand the fixed income world quite well, I was thinking, hang on, do I understand that distinction? So help me. Yeah, so people will talk about buy and maintain or buy and hold. It's really a concept in the insurance market when you're backing liabilities that are really not changing and you want to buy fixed income that will really match those liabilities. that's a phrase that people have adopted and brought into the pension world but it's not really insurance and pensions have some similarities but they're not the same and um but i think people who had heard that idea of of buy and maintain or buy and hold had got the idea this is a way of harnessing fixed income um without having to pay the costs sort of continuing to actively manage your portfolio.

22:39Low turnover active is sort of the same thing. You're actively managing a portfolio, but you're not seeking to turn it over. And for investment grade credit, those turnover costs can be quite high. So the people here were really committed to that because they saw that that was a way of managing the portfolio actively, but without a lot of trading costs. and the people in the buy and maintain strategy had definitely heard this is a really low cost way of managing fixed income but they hadn't appreciated that they were basically just

23:14Rachel Elwell:the same phrases for the same portfolio yeah well we're going to talk about some of those investment strands but since we're talking about fixed income investment grade straightforward explosion the last two decades around private credit with its attendant risks and rewards and And some like myself would have been arguing for a while that there's been too much enthusiasm and disappointment is the natural contour in this space. How do you think about that at an asset allocation level? So we have to bear in mind that it's not been the pool's job to decide whether how much funds want to have in private credit.

23:53It's been the pool's job to date to talk. OK, you want to have private credit in your allocation. You've been advised by your consultants or other advisors about the structure to have. How can we most safely deliver that asset in the way that you've envisaged it in your strategy? And so we engaged with our partner funds on what are you looking for? What sort of return do you need to meet your strategic objectives? actually you don't need to go after some of the riskier end of the private credit market you can see that as a diversifier a source of income you are long-term um asset owners so you can bear the liquidity risk and hopefully harness a liquidity premium debatable obviously in private markets, whether that exists.

24:49But trying to make sure that we are working with, in the case of private credit, we do that in partnership with, typically with GPs, to make sure that the way that those portfolios are constructed are managing the risks and are at that less risky end of the market, which I think will serve as well as we see this current phase play out.

25:20Rachel Elwell:I'm thrilled to share that the Money Maze podcast is sponsored by the World Gold Council. They champion the role gold plays as a strategic asset through expert research, commentary and insights. And it's not just your portfolio that may benefit from gold. Learn how gold mining is supporting female economic empowerment and small businesses via their new documentary series called Gold, The Journey Continues. Tap the link in the show notes to start watching. I'm excited to announce that the Money Maze podcast is sponsored by the London Stock Exchange Group, known as LSEG. At the heart of the global economy, LSEG provides data, analytics and infrastructure that connects investors, businesses and economies.

26:01Rachel Elwell:LSEG is where ideas meet capital, enabling sustainable growth and opportunity. Tap the link in the show notes to learn more. which then of course takes us to the the two levels of to insource versus the outsource and to be passive versus active we've had a lot of conversation with you know manny roman at pimco and uh you know various others about just how how active does outperform passive in the world of fixed income but equally there are costs and uh you know these aren't these sound simpler questions than of course they are but just you know just let me understand how you think about approaching those two topics?

26:40So let's start with active versus passive because it's a really hot topic. And I think historically the LGPS has had significant proportions of its assets in public markets. So I think it's important that we think about fundamentally at the heart of it, what are you trying to achieve with your investment strategy over time? and what's the best way of accessing that in the market. So I think when we talk about the active versus passive, we can sometimes get caught into have you under or outperformed a market in the short term. If you are a long-term asset owner, you're actually wanting to manage long-term risks.

27:23There are times when passive management is a really important tool to have in your toolbox. but there are also recognition that being passively managed and not thinking about what's happening with that underlying benchmark can send you on a journey that is increasingly concentrated and we've probably seen a bit of that in the equity markets recently but it's not I don't think it's right to sit here and say active is always better than passive and we can clearly see that over a fairly long period if you look at equity markets. So if you think about we want to get exposure to a given market, and then what's the right best way of doing that?

28:13For equity markets, we still see that there is value in being actively managed, particularly around those long-term risks, or about diversification between countries and geographies. but we also think that there are efficient ways of accessing that and we would want to give our partner funds diversified exposure to it so we would have a blend of working with some specialist managers externally partnering with them i'll come back to when we decide how to do that we have our in-house team that is actively managing great track record slightly more benchmark aware being able to manage those long-term risks.

28:57And then we'll also have some more index strategies, whether that's smart beta or market cap. But if you look at fixed income, I mean, there are ways of constructing indices to avoid this, but it's very basic level. You are investing into the most indebted companies if you do it passively. And I think the value from active management on fixed income comes from really understanding what are your risks when it goes wrong. We've had a very benign credit environment for several decades now. And I think sometimes people forget that it's not a free lunch. And so I think passive for fixed income needs a lot more thought.

29:48especially when we, I think there is generally recognition that what we've had for the last couple of decades for many, many reasons is not necessarily what we're going to be seeing for this next 10 years.