The value of good governance podcast

27 February 2020

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A podcast with our IAC's Independent Chairperson Candia Kingston

Katie Eagles talks to our Investment Advisory Committee Chairperson Candia Kingston about the importance of independent governance, how governance helps deliver good customer outcomes and how responsible investment will impact the future of governance.

[ Katie ]

Hi I'm Katie Eagles from Royal London's investment solutions team and I'm delighted to be joined by Candia Kingston the new Independent Chair of our Investment Advisory Committee better known as our IAC. In this podcast we're going to explore the role the IAC plays in challenging and debating Royal London's views, the industry challenges on the horizon and how this impacts governance and the focus for IAC over the coming months and years.

[ Katie ]

Candia welcome. Firstly, tell us a bit about you and your background.

[ Candia ] 

Well as you well very quickly tell by my accent, I'm Irish born and bred in Dublin. And after a degree in Economics and Psychology I was drawn to Scotland by a somewhat misguided notion that everybody in Scotland skied and I thought I was going to spend every weekend up in Aviemore skiing that turned out not to be the case. And what I thought was going to be a year long slow journey here has turned into over 20 to 25 years in Edinburgh. I qualified as an actuary in what was the old Scottish Life. And after eight very happy years here I left to pursue my primary interest which was good governance in pensions and investment. So, for the last 15 years I have been focused on this working as an independent trustee for defined benefit and defined contribution schemes and also on independent governance committees for investment and pensions.

[ Katie ]

Fantastic and how does it feel to be our new IAC chair?

[ Candia ]

Well it was just lovely to be back at Royal London when I joined last year and for me it was very much like a coming home. There were still some familiar faces that I recognised from years ago. I've always admired the ethos of Royal London and the old Scottish Life as was and because of the mutual status it clearly allows and the company to be far more focused on members than other companies can and rather than meeting the needs of shareholders or a London return £150 million pounds to its policyholders last year. So the policyholder can be completely happy that their interests and the companies are completely aligned and what's good for the company is also good for them.

[ Katie ]

Tell me, how does the IAC hold Royal London to account?

[ Candia ]

So, what we do is provide a forum for overseeing the investment offering under the governed range and the other matrix funds. So, we offer guidance support advice for the investment proposition and we do our very best to anticipate problems and at the very least try and deal with problems as they arise.

[ Katie ]

And obviously you're an independent chairperson. How important do you think it is for providers to have independent reps on their investment committees?

[ Candia ]

So for me, having independent representatives is about two things. First of all, I think the obvious one is conflicts of interest. So, when you have a product provider like Royal London intermediary and using an in-house investment manager like RLAM, it's very important that the in-house investment manager is held to exactly the same account as an external manager, so I think independent representatives help with that.

But I think the more important thing for me is about diversity and this is not diversity in the sense of ethnicity or gender. It's about what background you come from and what you bring to the party. So, J.B, one of our independent members has fantastic experience working with a variety of different investment companies and he has really an in-depth granular knowledge of what they can provide. Whereas my background is more on governance in investment and pensions and focusing on good customer outcomes. So, it just means that we will be challenging on different things but hopefully we are bringing a completely different perspective to the committee than it would have if it was just in-house representatives.

[ Katie ]

As we enter a new decade Candia, what do you think the main challenges for customers investing their pension will be?

[ Candia ] 

There's a general shift in society away from I suppose paternalistic ideas of your where the company looked after everything and took on all the risk towards the individual being responsible for their own outcomes. And I think that is a huge challenge to manage. For me I think there's two key risks here. The first is that we need to encourage customers during the accumulation phase of their pension to take on enough risk over the long term to give them optimal outcomes because pension investing is for the very long term, and there is a risk that if and when a market correction comes, that people who are perhaps not so familiar with investing might be scared off by this and move to lower risk funds. And I think that's something we have to guard against.

I think risk is even more difficult to manage during the stage when customers are drawing down and I think ranges like the GRIP range for the government retirement income portfolio are extremely helpful here in terms of helping customers to understand how much they can afford to drawdown during retirement. I think one area that the industry really needs to get on top of is mortality risk because if we all have to draw down on the assumption that we're all going to live to 100, the vast majority of us are going to die holding a lot of capital which is not optimal for either society or the individual. So, I think the industry has a big challenge to try and somehow pool mortality risk more effectively to provide better solutions for customers in this regard.

[ Katie ] 

Yeah sure. What do you think the main focus will be for our IAC over the next few years?

[ Candia ] 

I think there's a number of areas here. I suppose the big one is responsible investing that's going to be a huge challenge and for society as a whole and for the pensions the investment industry in particular. The second thing I think that I would very much like to be focusing on the IAC is transparency and there's already a lot that we do here. So, for example our minutes are published every quarter so customers can see what we're talking about. Any concerns that we might have and so that's available. And it's also about charges because we want to make sure that for our financial advisers and their customers that they are able to view our charges as clearly and transparently as possible, so that they can make informed decisions. I think one other thing that I would like to focus on at the IAC is that the vast majority of the funds that we have are within the governed range but we do spend quite a lot of time talking about the smaller funds within the range and concerns over the governance and the performance of those. And I think that I would like to move away from concerns over shorter or even longer-term performance and become really focused on governance within these funds because one thing we all know is that picking consistently long-term winning investment managers is a fool's errand.

[ Katie ]

Absolutely. How much focus, you mentioned the Governed Range, how much focus is there on the strategic and tactical asset allocation of our Governed Range?

[ Candia ]

So we monitor both the strategic and the tactical asset allocation on a quarterly basis to make sure that they remain suitable for purpose and that the risks being run within the funds are within appropriate guidelines and that the funds are talking sufficient returns appropriate for their customers.

So, what we do is we oversee the assumptions and the method driving the strategic asset allocation. So, for example we recently looked at the 50/50 split between U.K. equities and overseas equities within our equity component of our portfolios and we questioned whether that remained appropriate. After significant debate we did get comfortable around this and we decided that it did remain appropriate. But we also look at the tactical asset allocation so the difference between that is that Royal London Asset Management make tactical decisions on a day to day week to week month to month basis. So, what we do is we oversee that tactical asset allocation process as well and just make sure that it stays within sensible limits of risk for the customer.

[ Katie ] 

And how does governance help deliver good customer outcomes?

[ Candia ] 

I think the key to good governance is a focus on long term outcomes rather than short term outcomes. So, focusing on customer value, on accountability, on transparency, on value for money -are all things that are going to help the customer in the long term, and they are part and parcel of a good governance framework.

[ Katie ] 

You mentioned responsible investment earlier too. How do you see governance evolving to incorporate RI?

[ Candia ]

This is something that I feel really passionate about and I see a tidal change in investment markets from the focus on responsible investment. And I see it in in every room in every committee that I attend. Over the past year just a complete change in how people are looking at this. So, I think the big change is from people seeing responsible investment as something that will bring you good karma. Something that's nice to have but will probably detract from investment returns to something that is essential to look at, both from a risk and a return perspective.

There was a meta study last year by Freed and Bush and this looked at over 2,000 smaller studies and which had all examined whether environmental, social and governance investing brought improved returns or reduced them. And what 90% of those studies showed was that having a focus on ESG factors not necessarily being an ESG fund but having a focus on those factors either improved returns or certainly did not decrease them. So, I think the evidence is there now that this is something that we have to look at. An investment manager who isn't doing that is being negligent and I think the biggest issue here that we're all very aware of is climate change. And for developed societies to move to a carbon neutral position over the next decades is going to take massive infrastructure spend and there is going to be a sea change in how consumers spend our money. We were talking earlier on about having your coffee cup, your water bottle, the way in which we live our lives is going to fundamentally change. So, any investment manager who isn't looking at that has got their head in the sand.

[ Katie ]

Finally, I want to ask you what role do investment beliefs play in delivering good governance?

[ Candia ]

So, investment beliefs provide the whole framework under which we provide our governance. So, we have a set of core beliefs on the investment advisory committee such that pension investors will be rewarded by taking long term risk, pensions is a long game and we believe responsible investment will pay off and are firmly committed to that. And diversification is extremely important. So, we try to ensure that our portfolios are as diversified as possible.

So, all of these investment beliefs underlie every decision that we make and inform our whole investment process.

[ Katie ]

Candia thank you so much and thank you for listening.

[ Candia ]

It's been a pleasure.

 

 

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The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The firm is on the Financial Services Register, registration number 117672. It provides life assurance and pensions. Registered in England and Wales number 99064. Registered office: 55 Gracechurch Street, London, EC3V 0RL.