Podcast with Michelle Ostermann, CEO of the Pension Protection Fund

I'm delighted to be joined by Michel Osterman, who is Chief Executive of the Pension Protection Fund, or commonly known as the PPF. I think since April last year, yes. So, gosh, we're now, what, 18 months in, wow, time flies. It has. And really excited to be able to talk to Michel, because she has an incredible experience in the pension industry, and particularly in the Canadian pension industry. And I think that is really relevant for this conversation. And everyone probably knows that the government and Rachel Rees have been studying the Maple 8 and trying to see what has worked, what hasn't worked, how can we adopt it. And so maybe Michel, we start with that in terms of your background in the Canadian industry. But I know that you also had a little sudden in the UK with rail pens, so we've tempted you back, so that's good news. We've got, we've got a good import as well. So Michel, let's talk about the Canadian Pension Industry, and what's really worked there. Sure, thank you very much for having me. Truly a privilege. I was, I took the opportunity to listen to a few of your prior podcasts, and I was really impressed with the quality of the speakers and the insight that they shared. So it's a high bar, and thank you for the privilege. Yes, I worked in the Canadian Insurance and Pension Industry for on and off about 30 years, and two of the largest Canadian schemes, which often referred to as Maple 8, both of which are 200, 300 billion pounds dollars in size. And so I have the good fortune of having learned quite in depth working as of the Canadian model. I think there's a lot of interest in the Canadian model globally, as there is the Australian model in a bit around the Dutch model. Those three would probably be considered top in the world. And I think it also very interesting, though, when you look at the Mercer Global Pension Index report, Canada doesn't rank as a country for its pension system nearly as high as the Canadian model by itself would rank. In fact, I think a UK ranked number 12 as a country in Canada was only number 15. Yeah, that's quite surprising, because when I look at it, I go, I wouldn't back the UK in its pension system over the last 20 years, if anything, it's been a detriment to the UK economic growth. So it did surprise me that. Yeah, and the measures that they use to juxtapose one country to another, as you know, is exceptionally difficult to compare any two systems. So they look at four key measures, but across the main, the UK system, is actually quite significant. What is unique about the Canadian system is that Canadian model. And it's referred to as a Canadian model in that it was, especially when it was born 20 plus years ago now, it was quite distinct in its nature. And I think the things that can be learned from it globally, but especially here in the UK, would definitely center around the governance model. If you let me pick the top sort of three out of five, all three of the top five would be the first three in the top five would be governance. It's so important to have the governance model erected in a way that allows it to be a hybrid of public and private. And I think that's what makes it stand out the most. So next to governance, I'd say scale, the appreciation that building sufficient enough pools of capital, which are often referred to as social capital, have allowed you to be able to bring the sophistication and the cost structure down. And so the Canadian model is mostly revered for its use of private assets subsequently. And it does use not only a very sophisticated approach, it uses pretty well all forms of assets you can possibly imagine, including the use of debt, which they issue themselves. And that's really interesting because we haven't really gone down that line. And the PPF can't issue debt on that, right? No. Maybe that's one topic to come back to in terms of delivering growth. But maybe just touch on the performance of those Canadian funds. What have they actually achieved? And what does that mean for the overall Canadian pension system? Is it better funded now compared to the UK system? Yes. So there's definitely different ways you can look at the degree of fundiveness of a system. But technically speaking, when you look at global pension assets as a percentage of GDP, Netherlands is usually considered the highest. It's almost 2 to 100% of their pension assets as a percentage of GDP. Canada ranks just under that at about 180%. And then the UK, about 120, and the US somewhere in between. So the sheer size of the pension assets relative to the country is a really important indicator of the sufficiency of the system. And I think the Canadian system has grown to be that size of asset scale because of its model. So 25 years ago, when our founding fathers decided how they would structure these things, they recognized that they needed to make them legislated. They created governance structures that pooled pockets of capital from around each province. So they were state organized. And they put multiple sectors into a single scheme. As a result, these large pools of capital, now at the time, they were still considered relatively large. But today, they would be considered behemoth. Many of them 100, 300, 500, and one even now that the CPP is just crossing over the 800 billion mark and nearing a trillion. And so most of the value that they have accrued is the result of the interest, their gains on their assets. They earned roughly 8 to 10% every single year for over 20 years. As you can imagine, the compounding effect of that, they also invest, as I said before, the use of leverage combined with low interest rates of the last couple of decades have meant really big carry trade. They've been able to exert as well as use of private assets, making quite a bit of risk and ill-equity risk in particular to be able to bring that high of a return. And when you stand back and look at the systems, I don't think many people appreciate this, and it's not just unique to Canada, but in a model like that, if you were to look at every single dollar of lifetime income that a Canadian takes out of these schemes, of that dollar about 10 pence of it would be coming from their own contributions, 10, 12 and a half. And then another 15 to 12 and a half would come from their employers, having contributed. So in total, about one quarter of all the lifetime income you live off of came from your own or your employer's contribution. And three quarters are 75% of everything they live off of for 30 plus years comes from the investment gains. So the majority of the heavy lifting of a really well-functioning, highly efficient DB pension comes from that investment gain. When you look back on it now, do you think that that was a benefit of a moment in time when private assets were becoming more popular, when interest rates were low, and that will be more of a lagard in terms of performance going forwards, or was there an essential reason why the focus on private assets worked for the Canadian funds? Yeah, I think there's a cycle. Every economy goes through certain cycles. Even the various asset classes, they rise and fall in the relative value they provide to their total portfolio. And I think there was a period in which private assets made an enormous amount of sense. And in Canada, in particular, we were trying to deploy a very significant amount of money. It was coming in faster than we could deploy it. And so because they were open schemes, most of them remain open schemes, and they were largely invested in public assets that we were transferring over to private assets. The rate at which we were to put it into private assets meant that we had to build larger origination teams. We had to find either external managers and/or internal capabilities to be able to deploy. As I said before, we would often be able to use a bit of leverage inside of those strategies as well, which was really low cost of capital for us. And the assets that we were deploying into were still quite nascent. There wasn't quite the competition that you might get today. Now that more people have tweaked on this model, there is a lot more competition for those private assets. There are more large global institutional managers like the Canadian schemes, the Aussies, the Dutch, everybody's competing in the same frame. And so it is making for more competition and arguably bidding down some of those earnings on those assets. It also, I find with the rise in interest rates now as well, it doesn't make the argument for some of those private assets in their nature of funding quite as viable. And you can tell that because the private equity market in particular is a bit stalled in a way. It's having a hard time creating enough liquidity for those of us that all sort of pile in to be able to get out, the creation of Continuation Funds, for instance, and that the private equity industry is now chasing after the 401(k) and the retail sectors to be able to bring solves sort of the cash low problem that they're facing. And so that's just a sequence of events that's occurred over a couple of decades. And so you'll find most of the largest global asset owners are now either pausing or slowing the rate which they're deploying into the private assets and instead they're focusing themselves on asset management. How can they create wealth? They actually have created teams called Value Creation Teams, which are trying to make sure they sweat those assets to be able to get the returns that they had originally envisioned when they priced them and put the first put them on the books. And I guess the lesson is that you shouldn't get too locked in into one strategy and maintain a flexibility rather than thinking that this process works, therefore it'll run for not just 20 years but 40 or 50 years, which some of these decisions have to be taken over. Exactly, and that's where I think the big learning is not just for the Canadian model, but for several countries who have deployed this model have to recognize that it's a lot of cost to build internal private asset teams. You know, those are very expensive resources, both in systems and travel costs and the relationship management part of the business combined with the expert skill set that you need to hire off and out of things like Wall Street and Bay Street at high price points. To be able to maintain that team and that fixed cost means you have to be able to keep those originators deploying. Yes. And when you try to turn an originator who's a great sort of broker or relationship manager and, you know, deal-finder, turn them into an asset manager, per se, put them on a board, have them be able to work out and realize some of the returns that we had priced. It isn't always the exact same skill set. It isn't always quite as appealing and so even trying to reset the nature of the team and to bring in different skill sets and/or different sizes for the team at different periods in the market. This is what I think a lot of the firms that have built these private asset capabilities are learning how inflexible they can be and how much they have to prepare themselves to be more malleable. Interesting. And just to explain one piece for those that don't know, cost of debt for a pension fund of scale, what are you able to achieve in terms of that cost of debt, can it be very attractive levels? More exceptionally, so those that are sovereigns, and this is a global comment, those that are sovereigns that have the ability to issue debt would get the same rating as their federal government. So a AAA rating, if they were an arm of the Canadian government, for instance, or part of a provincial or state government, they'll get, you know, very close to, if not equal to what they'd get for the sovereign credit. Okay, so really compelling in terms of adding to returns over the long term. Very compelling. And it's convenient in that that debt is being issued for a purpose. It's, you know, to help facilitate either liquidity and/or timing or, you know, enhance returns for a pension fund as opposed to the federal government having to raise that debt. And it doesn't recognize from the sovereign credit rating agencies in quite the same way when it's inside of an arm's length pension fund that it is when it's right on the national balance sheet. And how important is the debt piece being in terms of driving returns in the Canadian system? Oh, I think that differs because they don't all use it in the same way. And the degree of debt can vary. Sometimes it's issued at the top of the house, so as an overlay. Other times it's issued as part of it within an asset class to leave up the asset class. Sometimes it's inside of the individual transaction, right? It's the debt used for the mortgage to back, you know, some kind of equity is a real estate equity investment. So there's several forms of it that would show up in different places. Any different than you would find inside of an asset manager, you know, they might use that type of debt structure to be able to fund their private assets inside of any other asset managers portfolio. And I suppose it's a mechanism of maintaining risk controls as well as providing performance. It is. It's very helpful for managing liquidity. So these firms, the largest firms would have fairly significant treasury teams that are both trying to issue that debt and then manage the hedging, the entire hedging program, including the use of derivatives and the cash required as collateral to back those derivatives. So they get very complicated. I think that's another big thing that differentiates the Canadian model is not just its governance model and its scale, but its sophistication. And by that, I mean, not just the use of those bottom-up assets that sound quite interesting private assets, but the top-down mechanisms that are used, everything from risk budgeting to a total portfolio asset allocation approach, combined to the use of a treasury function, the use of debt, and the hedges and derivatives and the overlays that are used. It's sophisticated. I would argue is probably some hedge funds and definitely some of the larger asset managers. Interesting. Michelle, the Canadian system, I often think, is a DB system and then I'm told, no, I'm wrong. It's not a DB system. Tell me what it actually is. Sure. So technically, it would be what we call the find ambition or target benefit. So it was about 20 some years ago, a lot of the public service DB schemes were changed to what we often referred to as joint risk sharing schemes. And so it allowed us to be able to create more governance model that bought both employer and employee to the table and that they both had skin in the game so that things like inflation in particular, were not a guaranteed feature of the DB. They became a bit watered down and that's what created defined ambition or target benefit. And so it's very close to a variation of what's now in this country called CDC. So explain what CDC is. What is it stand for? What is it? CDC is a collective defined, like a defined contribution, but a collective version of it. And what it's meant to do is be a variant of DB. It's all the lifetime income capabilities of a DB, but it's able to do it in a collective fashion. So you're not saving as an individual. You're now part of a pot that is about that pot's returns rather than your individual returns. Exactly. So it's collective pooling of risk. This is the thing that differentiates it from traditional DC that looks more like DB. It's a hybrid of the two. And so some country is progressing with this, whereas the UK on this. I get the impression that the UK is highly motivated on it, that we have one launched version of it that's sort of a trial and that's early trial phase. The government's been heavily motivated to be able to bring it to bear. There's even just the minister for pensions a few weeks ago, I spoke quite candidly that he wants us to just get on with it and innovate, make it happen, I think is what he said. And why do you perceive it as being a better mechanism than what we've got today? I think the corporate DB is effectively, the version here in the UK is effectively inviable in the long run, certainly on a corporate balance sheet because it is quite strict in the guarantees around each of the defined benefits, whereas collective CDC allows for some safety valves inside of the system for risks to be shared and that benefits can be a bit tentative in nature. Although it wreaks a bit of, in the old days, what was called with profits, and so people always a bit nervous to be able to pool those kind of risks, it can make the scheme a little more tenuous in that last man standing who's going to get the additional surplus that might remain in it and/or who's going to actually bear the risk, because it can vary by people coming in and out of such a collective scheme. The intergenerational unfairness is sometimes a challenge. The thing though is that I think the DC version of pensions right now isn't quite a pension yet. It doesn't have that income that draw down. It doesn't really benefit from a lot of that pooling capability. And the DB in the UK is just a little too onerous and it needs to be made more viable. It needs to have a few of those safety valves invented into it. So some variation of the CDC, I think, is the inevitable long-term outcome for the country. In fact, in most countries, as their DBs are evolving, they're getting closer and closer, same with their DCs. They're starting, all of Australia is starting to think very heavily about how to evolve their DC into more of a DB-like. And even at USS, I love that USS has a bit of a hybrid model, they're getting quite creative there between DB for their first, I think, 60K and DC thereafter. So some innovation needs to be had and DCs definitely are variant of DC is likely the end game. Interesting. And one of the hats you wear is as chair of the IC, the International Centre for Pension Management. Don't just tell everyone what that actually is and what does it bring to your role as Chief Executive of the PPF. Sure. Thank you very much. I've been a part of the ICPM now for well over a decade. I stumbled upon it pretty early in my career, thankfully, and recognized that when you get to a certain stage in pensions, there's not much more you can learn out of textbooks. It's a fairly small and niche type profession. And going through uni, it's not something that's terribly well documented. So the ICPM is simply a network, as it says, it's International Centre for Pension Management. It is now we're about 54 of the largest most sophisticated pension schemes in the world. Everything from some that are sovereign wealth funds, that are just managing assets, that are backing the pension of the government's national pensions system, but not explicitly a pension fund. Others are very specific pension funds with a specific sector or a sovereign liabilities. And this network has been formed quite exclusively with no media, no sell side, invited is literally just a network. It's a co-op. Okay. And we have the 50-some members, each of them pay a tiny bit, just to structure ourselves. But all we really do is share best practices. We'll get together a couple times a year, and what we call a discussion forum. So the conference like, but without the typical conference elements. And we share amongst each other. So you're expected, if you're a part of it, to both give and receive. So we ask only people that are willing to put up, say their chief risk officer, to come and speak to the entire group, to make sure that those CEOs are committed to sustaining the network and it's sharing, it's exceptionally candid. It is, I think, what's not single-handedly, of course, but I think it's been a big part of what's allowed the pension industry to increase in its sophistication at such a rapid rate. Over the last 20 years, I know many people might think that competition drives innovation, and competition creates. progress. I would argue, in the pension industry, it's our lack of competition that is actually created a lot of our collaborative progress. We share quite readily amongst ourselves. And because it's an Aussie sharing with, you know, someone from Holland, there's no, you know, necessarily fear that a liquidity risk model from one country isn't portable to another country, and that it might be, you know, create competitive disadvantage. So I've found that most of my learning, some of those technical learning I've had in my entire career has really come from that group of peers. And you mentioned Australia, they've obviously been one of the systems that's been held up as particularly successful over the last 20, 30 years, and now they've got some extremely large pension funds that have an important role to play in a number of investment markets. And one of the things that they have managed to do is have significant domestic investment, both inequities and in real assets or in private markets. How do you perceive how they have done it and what are the differences and what are the drivers for their level of domestic investment? That's a good question. I'm relatively familiar with the Australian system, but I'm sure you get a much more robust response from an Aussie directly. But I'll take a stab at what I see. As Canadian, I noticed that we would scoop up a lot of Australian infrastructure assets, a lot of public assets, the UK as well, frankly, more than we were in Canada. And so we were naturally attracted to the Australian market because it was privatizing assets. There was the ability for us to be able to help with infrastructure investment in particular. So it was a good supply of well priced assets from a stable country that had good currency hedging capabilities for us. And it had rule of law. It gave us a good regulatory environment to play with all the things that we were required to be able to do these very large scale investments. So it makes sense that the Aussies, when they got organized amongst themselves and started to create enough scale and their schemes, they chose as well to create in-house investment teams. And they, too, didn't have to look really all that far to be able to find the assets, the same ones that we found valuable being Canadians. So I think that was part of it. And in their own backyard, they found a lot of opportunity. I think they were also motivated to be able to create scaled investment capabilities. They created an organization called IFM, which was really quite unique. There aren't many like it in the world. And it was, again, kind of a cooperative undertaking. And that asset manager was asked to be able to invest for them globally, sort of outside of the country a little more than locally. And this, I think, too, made that the Aussie funds and their home team, their investment teams, who were building themselves, were focusing a bit more domestically. And IFM was doing a bit more globally. Now, that's in the early days. Today, if you were to look at Aussie Super's model awareness, awareness super, et cetera. A lot of the FMC, I think they're all coming over here. They have offices. They own King's Cross every square inch of it, I think. Every time I go visit an Aussie, they're always at King's Cross. And they have, as broad a capability and as deep a footprint as the Canadians or the Dutch would have now. So although it may have started quite organically, locally, and they're still sitting on all those assets, they now have the same attention to the global investment landscape as the rest. And what do you make of recent commentators, politicians in Canada talking about increasing the level of pension fund investment in domestic Canada? I think this is not just Canada. Obviously, it's here in the UK talking about productive finance concepts. Most developed market countries, I see their pension systems looking to do the same. So this productive finance, what sometimes we refer to as dual mandate, is a hot topic. We at our ICPM meeting speak of it often, quite a bit, as it's a collective area of focus. I think what's obvious is that countries are, you know, feeling more poor than they may have a decade or two ago. As a result, they have to go look for places to be able to find investment growth wealth. And you can't help but look at these pension systems. Now that they are of material size and sophistication, their attention has turned to how can I leverage these pools of capital to be able to, you know, solve an at-home fiscal problem. The challenge I think is that, and every country seems to be roughly the same, the challenge is that governments are budding up against fiduciary duty. All right, this is the challenge, is that these pools, which we call acetone or pools, were created as quasi versions of public and private nature. So spun out of government, usually given some sort of tax preferential treatment or, you know, have a different regulatory regime or no regulation at all. And as a result, the privilege in how they operate, being not for profit as well, the privilege in the way that they operate means that the government, you know, might have incentive to be able to, you know, get payback for that that they've provided. At the same time, these, these bodies were set up genuinely arms length from government to protect for exactly this, this government interference. And it is natural for government to want to do that. But thankfully, most of them, almost all of them were erected in a way. And this was very, had a lot of foresight 20 years ago to make sure that they are set up truly arms length with independent governance models that allow them to be able to do what's right first and foremost for the member and for that purpose that for which they were erected. It's a bit more gray, less black and white for those organizations, which are called sovereigns than those which would be sector based or trustee based. But otherwise, tiny bit of gray there, otherwise, it is pretty clear that the fiduciary mode of has to come first. Now a few countries, a few places over the years that have tried to influence that and change regulation or legislation have always struggled to be able to overcome that fiduciary pressure. And generally, the workers capital often that you're trying to sway and it often doesn't result in regulation or legislative changes that stick. There's a few examples where it has worked and works well. Quebec is one of them. They have a sovereign fund there that manages multiple types of liabilities, almost exclusively for the provincial government. And they have been mandated 30% allocation to domestic investment. And it works, you know, arguably it works. And so I think it can work. It's rarely gets formalized in that foundation. But right now, it couldn't be harder topic. Interesting. Let's go on to the PPF. So what to try to do to come and join the PPF in the first place? Oh, goodness. I think the UK pension system right now is at an absolute inflection point. I can see that the stage is set perfectly. The government is serious and motivated to be able to create policy changes. I can see that the intention around growth has driven attention towards pensions. And this is a really important point. I think the ability for pensions to be reformed and their interest in being able to create more growth are really the same problem they're trying to solve in my mind. 20 years of under pensioning and under equifying that pension and the growth inside of a pension is certainly directly related to the lack of growth that we're experiencing, maybe not single handedly, but it's a lot chunk. You go through the numbers and we still got a trillion pounds in 1.1 trillion pounds in DB schemes, which have been de-risked and we're slowly scaling up the DC schemes. But we sort of had at least a decade's worth of a gap in terms of productive capital in the UK as a result. And still continuing until something changed on exactly that trajectory, that de-equification is often referred to as de-risking. But arguably it is just re-risking. It's a different form of risk that was created. The risk is just pushed onto individuals and there's a gap between affordability or lifetime income required, lifetime income, sufficient adequacy that was traded off. So we reduced our adequacy to reduce arguably to remove a risk. But it's just shell game effectively that risk still exists in a different form. So talk to us a little bit about the pension protection fund itself. I think you've had the 20th anniversary this year. Congratulations. So why was it set up? What's it done? How big is it? So the PPF was erected almost exactly 20 years ago and its purpose was to really be the backstop for the corporate DB pension system. And at the time that had 7,500 different schemes in it, I think it was closer to 2 billion pounds versus the one point something today. And that has gradually over the last 20 years resulted in the PPF being just over almost half a million members and just over 30 billion pounds. Now when we were set up, it was intended for us to both be a backstop for the entire system. So almost to act like a bit of an insurance company, if you will, in a way, publicly owned. And our job was to collect a premium or a levy from those 7,500. corporations that had pension schemes, and collect those levies, save them up, be able to invest them so that we could be a backstop. Should any company fail, our job is to be able to make good on that pension scheme, to be able to take all of those members on, unquestionably, whether the scheme is underfunded or overfunded, either way we take full responsibility for both the members, the liabilities, and we absorb all of its assets. And whenever a scheme is insufficiently funded, it's our job to all the top it up, and we top it up using those reserves that we've been collecting through levies and growing over the last 20 years. So we operate both as an insurer in a way and as a pension fund. And our insurance piece of there are responsibilities is now getting lighter and lighter in its obligation, thankfully, in that the pension system that we're back stopping, this one, something trillion pounds of corporate DB, is becoming better and better funded, large part due to interest rates and increased contributions from sponsors over the last, this de-risking, if you will, strategy over the last 20 years. And so the need for us to be able to have, collect a levy is reduced, and the ability for us to be able to hold these reserves and grow these reserves to, you know, forever will be, we're the endgame for that entire system. For us to be able to backstop that system for the foreseeable future is something that we've, we're quite well equipped to do and quite proven in our ability. And you've got a 14 billion surplus at the moment, which sounds a very nice amount of money as to have a 14 billion surplus, which has been really important to have that as that backstop because you never know when a scheme is going to fall into it. And so you'd need to have that slightly more than rainy day money available. Is there now a changing thought process because DB schemes are better funded and because they're sort of getting every year, they get closer to the end of live anyway? First, I have to correct you in the use of the term surplus. I get, I find people use that terminology quite a bit, but it's really not an accurate reflection of it. And I'll explain why. The pensions that we backstop effectively require us to be able to hold reserves. And so we need monies in the future for potential claims and for improvement in longevity and for anything that's going to change in our expense structure, etc. So we have to hold reserves for the future of the pension industry requiring us to scoop in and cover any underfundedness. We also need to hold pension liability reserves or reserves to backstop the pension liability. So right now, but half of our balance sheet is sitting as assets backing the pension need and the other half of our balance sheet is backing the future potential claims. And so one bit of an insurance book, one bit of a pension book in a way. Neither of those are surplus. Both of those are dedicated as reserves to backstop a different type of risk. Right now, people often look at our total balance sheet of 30 something billion and compare it to our pension liabilities of 14 billion and say, Oh, you must have another 16 billion of surplus. And that's not the case. If you look at us through a pension lens and you look at a pension liability, there's an instinct to divide assets by liabilities. But it's not there's really two forms of liabilities that we have or several actually, but two major ones, which are future potential claims, which but half our balance sheet covers. And the assets explicitly set aside to pay out all the future known pensions that were responsible for is the other half of the balance sheet. So the concept of surplus is not entirely appropriate and using that language to describe our balance sheet at all. I stand corrected reserves, reserves, well, I'll have to remember that. You have at the PPF wanted to, let's call it go faster, be one of the consolidators. The government has talked about having larger pension schemes to have scale just as the maple aid have achieved. What gives you the confidence that the PPF is the right consolidator for the UK market? Well, first of all, I think the PPF is a consolidator. Technically speaking, it's already consolidated the pension industry when we were formed had 7,500 schemes in it. It now has 5,000. And of that, 2,500 difference, 2,000 of them will come to us. So we have already consolidated 2,000 schemes. And that schemes that are going through difficult conditions. So as a result, you know, you're very used to managing complex situations. Exactly. And I know the wind up of a scheme and the transfer of assets, the valuation complexities involved in that can take years, many, many years to sort. We've now got it down to a bit of a science. We use several commercial firms, actuarial firms, legal firms, etc. that help us clean data, be able to get a proper valuation, to be able to physically transfer assets over to us, etc. And as a result, we've created this very efficient consolidation mechanism. And so that's what's allowed us in, I think there was a few years back, we were doing as many as 300 schemes in a single year. Wow. Roughly that range. So it shows that we're able to, and we can really bring them on board within a couple of years. Sometimes they take longer, but generally we're down to a two year roughly, a two year turn around, from the time that they go into receivership until we can have those assets and those members on the books. And so to accelerate that consolidation, what would need to be in place to actually make companies want to offload their DB schemes to you, rather than to a third party yet? Well, I think that's where we have to sort out the suitability of us as being a solution relative to the commercial alternatives. I think it's important that we have a thriving commercial consolidated market. We have a thriving biote market, by insurers, those options are still available, and that if the PPF were to be used as a consolidated, that it would be a bit of a solving variable. It would be the pieces of the industry that perhaps don't have those other commercial solutions. So we're still working through with the industry to try to sort out what that might look like. I see the potential coming from two points of view. So first of all, when I look at the PPF and part what attracted me to it, is it is effectively, I guess I think of it as really a mini version of the Canadian model. I think I was probably most attracted to it at first because I was quite pleasantly surprised when I got inside of it to realize it has all the same making. So it is a very sophisticated investment platform that's enormously scalable. It has an administrative capability in house administrative capability, again, very efficient, very low cost, very, very high service satisfaction rates, something like 97% member satisfaction. And we also have a very strong fiduciary capability, which is this actuarial ability to price value both the risk as an insurer and the pension plan design, and the the hedgedness of our assets versus our liabilities, all the all the I work would do. So we have three effectively three platforms that are enormously scalable. So that gives us the the ability to be able to do it. The next I'd say is that the industry itself right now we as a backstop to it have to bear quite a bit of risk in that industry. We wait for a company to fail. And when it fails, it's our job to be able to help remedy the situation and top it up. But in theory, the industry, if we are going to be the last man standing in this industry and the enduring solution that's meant to be there, we have 85 years of cash flows. Every time we bring on another scheme, it goes even further. I would say we're realistically will be here for several generations waiting for that industry to sort of play out over time. We're here to backstop the commercial consolidators of CDC where to come to life. I'm guessing if that has an actual element to it, we might need to play a role. So we just are this national enduring solution to be backstopping and hopefully facilitating the pension industry. And as a result, the current version of the PPF arguably could be improved by having the ability to consolidate some of these at risk schemes before waiting for them to fail. When we wait for them to fail, the member is only going to get 90 prints on the pound when they come to us. We've we were designed in a way that made sense 20 years ago because we were concerned about whether this thing would survive. So we chose a mechanism for doing a levy. We chose a mechanism for member having to have some skin in the game and the mechanism for us to be able to invest to grow enough assets to be able to sort of out, out earn the underfunded problem. So we had several levers available to us to make this thing viable. But arguably one of them had to be the member that I would suggest that today we might not have to do that. So could we do a hundred p in the pound today? Would that there's a lot is potentially a model where we would be able to bring members in at a hundred p to the pound. The challenge is to be able to make that viable and non threatening to the commercial industry. Do you not look at it and go there is a still you know it's 1.1 trillion pounds still there. It's vast. Is the PPF really a threat to the commercial interests? And I sort of cynically go some of these commercial interests are owned by sovereign will funds outside the UK. And here we are. effectively have a quasi sovereign wealth fund in the U.K. Why are we spending so much time worrying about commercial interest that aren't even in our interests? That's fair. I want to be careful not to offend because I do think that there's – it's important for an institution like ours to be able to play a role in solving, unsolvable things, to be a good public servant, to help improve the management of social capital. These are at the heart of why we were formed and what we're meant to do. So I am empathetic to the fears over it being commercially cannibalizing. I really don't want to cross that line. But I think you're right in that when you think of the one something trillion that's still out there, if the bottom 10 percent, you know, at a hundred billion, were to be eligible for the PPF. That would be the tale. That would be those things that are both underfunded, perhaps even too small, those schemes that we could maybe preemptively help. When you get too small and you are underfunded, you're going to a bit of a death spiral, right? It gets hard of you to get the costs under control and to be able to bring up the funding without just dumping more cash into it. Those things are arguably – those schemes are arguably quite unproductive finance. You're asking the corporation to come up with cash to be able to solve that problem often. And so this is where I think it could be quite accretive to both the industry and to the government and to those schemes if we were to be able to help with that tale part of it. Where do we draw the line in that? And it's a creative way of driving growth without government having to get involved. Because when you look at the large number of companies over the last 15 years that are spent most of their lives focusing on their managing their DB pension scheme, rather than investing in their business or delivering on growth opportunities, just releasing them of that DB would just provide them with a – it would be a great way to off their shoulders to actually be able to get on and grow their company. Yeah, I think you're absolutely right. The DB on a corporate balance sheet does not – is not viable anymore. Ever since the accounting rules changed and that regulators in so far as regulators want to make sure that the value of the liabilities is based on an interest rate, you know, that creates too much basis risk effectively for them to value their liabilities on interest rates and value their assets on equities, which is a shame. This is where I think there are potential to have DB remain open and run on to be viable. But in so far as that's not handled, the current version of DB as it exists is not viable on a corporate balance sheet. We need to accept that and recognize that this is transitioning away. But to not turn a blind eye to the fact that we should consider how we want to repair some element of occupational DB like for the country. And I am so thankful there's a pension commission forthcoming. I'm really appreciative of a lot of work that's going on very recently on CDC to think a bit about the viability of that as a solution for the corporate – for occupational schemes going forward. I like seeing that DC is trying to figure out how to become a pension effectively and I always perhaps a bit cheeky to say we don't have enough pensions in our pensions in this country. We just have savings enough of them. Exactly. There is even the investment culture that we've kind of lost during that last 20 years as well to be able to invest and not just save. The DB ironically, the corporate if we allow corporations to simply become contributors, they bring the employees there a mechanism by which we can gather contributions and we ask them to do some matching. I think that's reasonable. But we stop there and not require them their balance sheet to be exposed to the full volatility of the fondness of those schemes and find a way to be able to create a viable occupational DB or CDC type system that gives maximum benefit to the member while not burdening a shareholder. Michelle, on the subject of divine contribution pensions, well we often talk about them as pensions but in the reality is they're saving schemes. But we don't really talk about pensions in the UK compared to the US where everyone talks about their 401k. If you're on Australia, they all seem to know how their Aussie super is performing, we don't even have that conversation. We're also starting to talk about contributions. I think that the level of contributions in the UK is absolutely wofl and all governments have just been putting it off. I think we started it 20 or 20 years ago and yet we're still very much at the low end of international norms and yet we're still not addressing it. You want to talk a little bit about how you see the general commentary around pensions in the UK about our level of contributions and also what we actually do with the money. Excellent question. I have noticed that since coming back to the UK in the last couple of years, it really is a very focused topic on contribution rates which is fantastic. It definitely needs to come up. The maximum that I see in other countries can be sometimes eight and eight. You know, eight employee, eight employer, even 12 and 12 knowing that we probably need to wear it eight. Yeah, I know. It's quite a bit. It's multiples lower. And most people would argue to replace lifetime income that you're working capital with the human capital with generally the industry recognizes that a replacement rate to get 70% of your working life income in retirement requires you to put aside at least 12, 15 and sometimes 20% depending on how it's invested. And so we're way off that mark. So I'm thankful that we're talking quite a bit about how much we should save. However, I worry that we're not talking enough about what we do with that money. I think the increasing of contributions will come and it needs to come. But just as importantly, to be able to make those contributions we're already making, make them work harder for their money. And the ability to be able to put it to work in assets that are going to grow faster more to be able to put them into structures that are sophisticated and making wise long-term asset allocation decisions. The use potentially the use of either leverage and/or private assets, low cost structures in which they're invested. All of that can make a much, much bigger difference than contribution rates alone. And I worry that we don't talk about that efficiency as much as we could, which means that instead of talking about value for money in the DC, think about value for money across the entire system. And instead of value for money being cheaper, many people are talking about value for money should be in what you get for that money. But just as importantly to me, it's that you're learning how to translate that money into lifetime income. Not just that you got the best return you could out of it, or that you even were able to get more wealth out of it, but that wealth is translated into lifetime income. That's what a pension needs. And to me, instead of being value for money, that's when it becomes value for a member. And I worry we don't speak enough about the value for the member. Yeah, and I think far too often we have risk warnings all over our savings or pension schemes that talk about the downside, whereas they don't talk about the downside of being too conservative. Risk is always a sort of, well, it's a four-letter word, literally. But we need to accept that you've got to be taking risk because you're going to be contributing into these schemes for 30, 40 years. No, it's so important to deliver returns over the long term, rather than just focus on protecting your assets. Agreed. I see we traded, really, as I alluded to earlier, we traded adequacy for security, because we thought we were de-risking, but not we weren't. And I think often we think of the DB pensions and DCs being two different things. To me, they're really not, they shouldn't be all that different. The DB pensions have a liability that's quite visible, quite intentional, if actuaries can calculate it. DC has a liability. It should have a liability. It's a notional liability, but the liability should be the sum of all those individual members lifetime income needs. And that needs to be notionally hedged, backstopped, created out of the assets. And I worry that we don't, I know some lifetime income funds and draw-down funds are being formed, and they're starting to think a bit more about that. But I think we have to communicate that to members as well, that their liability is still exists. It might not be visceral, but it still exists, and we need to hedge against, help them hedge against it. Tell me a little bit, Michelle, about what the PPF actually invests in. Sure, so our balance sheet actually looks very much like the balance sheet so I'm used to, when I worked in Canada, and would look very much like the UK's OpenDB schemes, USS Railpin, etc. It is about 50% UK, and of that 50% about half of it is GILTS and half of it is other assets. And in that remaining other half about half of that would be in these things we call productive finance, so private assets like private equity or equity infrastructure. And so we have naturally quite an allocation, at least seven and a half, eight percent already allocated to UK growth assets, but about half of the balance sheet is growth assets in total. So again, we manage it much like an OpenDB would, and a fair bit of equity is driving those returns. Yes, I saw something like 2 billion. pounds worth of equity you've got in there, which is and and that's equity that is what global equities or is it a yes, yeah global we have a decent amount of UK and not disproportionate to the global index necessarily but the surprise might well be that most people would think that DB schemes don't have any equities and PBF does so that really is a great example of scale and ability to actually invest yeah I would go so far as saying that DB should have equity in fact by its very definition a DB pension plan is making you know 80 year obligation and the best hedge for a longevity for inflation for just the growth you need so you don't live for your assets would be equity so I always found it a bit obscure to think if 20 years ago when regulators and accountants started to change the valuation and hedging mechanisms for DB that we obviously that's what killed it but it it made sense because we were worried about the volatility of the fundateness and we were worried that that looked like risk on a balance sheet now it may have to a corporate balance sheet admittedly that's marking to market but technically speaking it was really an absolute necessary risk and that is a very powerful form of growth the biggest sector growing the use of equities for long-term investing and stable patient capital investing are asset owners globally the concept of an asset owner I think is not spoken of nearly enough here in the UK or appreciated the important role that it plays it's a subsector if you will of the financial ecosystem in some of the most successful countries in the world they recognize these asset owners can use need equity to be able to hedge the various liabilities that they're backstopping and it is a very powerful form of growth because of its patient nature and it's not for profit in largely unregulated nature shall tell me a little bit about what an asset owner actually is sure yeah it's a common term that's being used more and more globally I find it doesn't show up in the vernacular here in the UK nearly as much as I see it elsewhere which is a shame it's it's really burgeoning effectively most simply put it is a not for profit version of an asset manager that is probably born from some type of legislation and it's usually an arms-length body or public corporation there are a bit of a hybrid between public and private they are becoming more of a very legitimate sector unto itself effectively I like to think of them as a pillar alongside the other three pillars in a pension system it's kind of jammed somewhere between the first pillar where all the government provisions or government programs are provided and the occupational or corporate pension layer they're generally speaking they're kind of like depoliticized sovereign wealth funds they're usually empowered to have a governance model that's arms-length and independent from government to allow for avoidance of conflict of interest and allow them to bring up sophistication and scale but the real power that they provide is that they're managing effectively social capital which is different than managing the government balance sheet or different than managing worker capital inside of an occupational scheme and what I've come to learn is the benefit that it is provided during market crises is that they often act as a bit of a ballast so when you think about go back even three years ago we had a bit of liquidity crisis here you know many schemes that were held the I'd we're trying to raise cash and in concert to one another whereas the more patient capital or asset owner investors that had more equity on the books and were long-term investors we're actually buying into that we're being the opposite side of that trade of that cash seeking trade similarly if you think back to few crises and when it worked even for come up of the Canadian schemes the asset owner the maple eight always were seen as a bit of a diversifier a little different than the banks a little different than the insurance companies still very long-term in nature didn't have the same regulatory pressures didn't require shareholder accommodations short-termism on a quarterly basis of reporting returns and so the Canadian government in particular would use the pension industry effectively as this little insulator and that when others were selling it was buying and we often use the term dry powder that you know we had the ability to be able to invest in markets were really at their poorest and in fact a lot of the gains we would make in the five years that followed a market downturn would come from the sort of ability to swoop in and invest in others we're racing out yeah just to have that balance in the ecosystem you know when everyone's talking about bubbles yeah actually when they pop you need someone to be there to effectively protect the downside but also take advantage of the downside and in the past I think decades ago we would have thought well that's a government's job to swoop in well they can't always and shouldn't always and they even have a relatively short-term view and you would think insurance companies would do it they're very long-term liabilities but they too are publicly traded have a quarterly sensitivity to their earnings and have regulatory capital that restricts the types of things they can invest in and so the asset owner sub-industry is really with a large pension funds especially the DB pension funds or the sovereign wealth funds all live and it's becoming more valued I found even the Bank of Canada really appreciated that the largest of the Canadian pension funds would you know trade amongst themselves we did a lot of pipes so public and private investing into public entities and we were able to help sort of difficult times when we needed you know recapitalization of certain sectors we were able to lend into the banks and be able to help with the repo market we'd often be on the opposite side of some of that repo wait that the Bank of Canada would often otherwise have to solve so it's a very powerful asset owner is a very powerful tool inside of a macro financial system that's really interesting so one interesting thing that's happened recently is the formation of the sterling 20 group launched at the regional investment summit in Birmingham I presume you were there Michelle yes I was give us some background to the sterling 20 what does it actually mean because it sort of feels as though it's an adjunct to the mansion house accord and it's all about getting investment into the UK yes I attended the regional investment summit up in Birmingham and it was really quite impressive honestly I wasn't sure what to expect my first time attending anything like that but the government and industry colleagues put on quite a show we had pulled together there was a dozen probably Aussie funds in attendance there was what 20 of us that are now referred to as the sterling 20 CEOs CIOs from all over the country and outside the country and I could tell the government's very serious about their motivation to create growth they have every intention to be able to attract both foreign and domestic capital and I could tell that they are making sure that pre-budget that there's a huge appreciation for all the efforts they're putting in to be able to bring us together and to be able to collectively invest more domestically and I think the interesting thing is that there was a feeling originally with the mansion house compact that was getting the conversation going mansion house accord was more about commitment and the UK and this sort of seems to be just developing it to say right okay this isn't playing lip service this is something we're expecting the industry to deliver on yeah it was very clear I heard the expectation is quite visceral that they're facilitating and creating the environment in which they'd like us to be able to invest more domestically and collectively but they were with no mixed words saying that they have this expectation of us now go forth and make it happen right on and on that note and one last question if I put you in the shoes of Rachel Reeves or Torsten Bell for a day and you can change anything or create anything what would you look to do oh excellent question I had a suspicion you might ask me this question so I put some thought into it and if you don't mind I'm going to be I'm going to stretch the question with it so I always look at pension systems as if they are three pillars I learned this the OECD published a paper probably 20 years ago on how you juxtaposed any two pension systems to one another globally when they're so distinctly different and they look at pension systems through the lens of three pillars which are release three layers and the first layer being the national programs that are provided by government might be state pension national insurance etc this second pillar would be the workplace scheme so DCDB all occupational employer driven often by sector the third pillar which is sometimes often the largest which is the commercial sector so this is where you would have lifetime savings type products effectively where the shareholder capital is backing it so the top tier third would be the shareholder capital the middle would be worker capital and the bottom would be taxpayer capital which are the backstops for those three layers and in every country they have different degrees of sophistication and utilization and I think the UK has to make sure that it's looking at itself through that lens more often because I think we can't have a broad brush one one great action to affect the entire system there's probably going to need to be something quite tailored and when I look at it through that lens I would argue I have three wish list items I was asked this question act by the CEO of Scott video was just a few days ago. And what I said was for the first layer or first pillar of the pension system, just more state and government provided, I think the number one most powerful thing we could do would be to fund the unfunded. I think there's such a gross difference between the size of those liabilities and the size of those assets and the gap is just growing so massively. It's, you know, it could bankrupt countries. I don't know, but the UK, I like to think that we'll grow that, but it's a significant concern. In the second pillar, which is with the occupational space, I think the most powerful thing we could do there would be to create a more vibrant asset owner sector. The corporate, as we talked about earlier, the corporate DB is all but dead and as it filters into a new solution, we need something that's either going to be CDC or a more sophisticated version of the dying DB because we need to create more efficient income. Right now, I think that the transition to DC is helpful, but it's not technically a pension yet. And the costs are, it's a dozen quite have scale yet and the costs aren't quite there yet and the sophisticated of the investments isn't there yet. It's coming. But to create more efficient income there, I think what we need to do is just get at scale in that sector with large, not-for-profit asset owners, a few just a few. And then on the third pillar, the top pillar where the voluntary contributions and investing comes from, those commercial providers, I think the most powerful thing we could do is to transition into an appreciation for investing versus savings. I think that cultural shift to value growth and the use of equity as opposed to fear it. And to not- we've used the word for so many years now of de-risking things and de-risking really just meant taking equity out of whatever investment. And so being able to make equity not a four-letter word and help transition the culture to the average investor and to the commercial providers that equity is good, absolutely necessary. Well, on that note equity is good, I'll take that. But I think equally, as you say, funding the unfunded, we've got to buy that bullet, that's the right terminology, probably isn't. But we've got to just take on that challenge and start thinking imaginatively, having an unfunded liability that goes on forever just is mad. And I totally agree with you. We mustn't look at these DB schemes as dead schemes that are just slowly paying our pensions. Actually, you can be really creative to the benefit of the pensioner, let alone the country and the taxpayer. There's so much that we could be doing. But on that note, thank you so much Michelle, really interesting conversation. Thank you, thank you very much.