Pension scheme governance systems can deal with troublesome situations if they are “dynamic”, according to Royal Mail Pension Trustees chief investment officer, Ian McKnight.

Speaking about how Royal Mail’s pension schemes managed to come through 2020 at the Pensions Age Spring Conference 2021, he explained that the schemes had around £13bn spread across different sections, with £0.5bn with the Post Office section and the remainder split between £11.5bn in an older section which accrued from 2012 to 2018 and over £1bn in a cash balance scheme.

He further explained that the older section was “fully funded on pretty much every measure” and all of the equities had been sold going into 2020 “so we didn’t get hit on that front”.

Meanwhile, the newer section had less than 8 per cent in equities coming into the year, while over 30 per cent had been portioned into absolute return funds, which McKnight said had “paid off”.

Royal Mail Pension Trustees chief investment officer, Ian McKnight, said: “In March 2020 we moved very quickly. Our governance enables us to be very dynamic so we went into distress high yield opportunities which, later in the year as yields climbed right back, we exited again.”

He also emphasised that, when it came to equities, sector positioning was extremely important and so Royal Mail’s schemes had moved to a “much more dynamic and nimble manager” and introduced a dynamic equities allocation, which he said was “a very interesting project”.

McKnight added that the team had drawn up a bespoke credit mandate.

He explained: “If you’re with a pension scheme that is very mature and looking to self-sufficiently run it, you might very well think ‘I’ll invest like an insurer, I’ll buy and hold’ which has been very trendy. I don’t see the benefit of holding a 20 or 30 year bond and having investment risk at the end.

“I’d rather, especially in a low-yield environment, have the investment risk sooner and locked down as yields come up over time. Of course, pension schemes have triennial valuations and you’ve got a volatile long-dated bond, it is going to mark down and capital protection is a key target for our older section.”

With regard to the newer section, McKnight said the scheme had steered clear of pooled real estate funds and had instead looked at direct investment and limited partner/general partner structure when it came to real estate investment.

He also stated that the real estate facet of the fund’s investment had a bias towards Asia as “that is where a lot of exciting growth and opportunities are coming”.

Speaking further about current strategy, McKnight said: “We have doubled our private equity allocation and considering the tech rally seen this year there is still plenty to go in the private markets, in particular in venture. Of course, we’re in a recession and when you’re in a recession there is a lot of money being made and you need to get in early.”

He noted that there was potential for volatility in the near future and impressed the importance of being dynamic in the face of this, stating that he found it “unfathomable” that some schemes without this facet just having to face what comes at them.

He added: “The trustee model isn’t actually a great one for running billions of pounds. We are three times the size of our sponsor and the governance in that business, or any big business, is huge and yet pension schemes are often run by lay people and the skills are concentrated within a tight pool of people.

“There is a supply demand dynamic there that you need the full amount of people to run things properly, and I think that is a problem.”

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