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BAE Systems’ pension scheme has appointed Goldman Sachs Asset Management to oversee its £23bn of defined benefit assets, the largest such mandate in the UK to date.
The appointment is the latest sign that increasingly onerous compliance requirements, rising costs and unpredictable markets are driving large asset owners such as pension funds to outsource the management of their portfolios – a practice known as For Outsourced Chief Investment Officers. They are betting that such OCIO agreements will help them improve performance and cut costs through greater scale and efficiency.
“Corporate DB schemes in the UK are maturing,” said Chloe Kipling, Head of Institutional Clients, EMEA, GSAM. “In some cases, this has prompted them to review the next Does the governance structure of the stage make sense.”
BAE Systems’ in-house investment management team of nearly 50 will join GSAM at the end of this year to continue managing two DB schemes which commit to paying staff pensions at a fixed level.
Back in October 2019, BAE’s four UK pension schemes, including the two largest covered by the agreement, BAE Systems Pension Scheme and BAE Systems Executive Pension Scheme, were in a funding deficit of £1.9bn. With a contribution from parent corporate sponsor British Aerospace (BAE), a defense giant that makes everything from Eurofighter Typhoon jets to nuclear submarines, the plans are due at their next actuarial valuation in March 2021. Received full funding. As of June this year, they had achieved a £600m surplus. .
Andrew Gallagher, chairman of the trustees of BAE Systems pension schemes, said: “Reducing costs and improving asset management efficiencies will be critical as we continue to look for ways to further reduce the risk of pension liabilities.”
Outsourcing agreements vary in level of control, with some clients wanting an external investment manager to handle everything: asset allocation, selection of individual funds and managers, and finally all risk management and back-office functions. Others want to maintain a veto over key decisions, or only outsource funds dedicated to specific types of assets.
There have been a flurry of deals in recent years. In February, the Royal Mail Pension Plan selected BlackRock to manage its £8.8bn DB scheme assets. Last year, the £13 billion UK National Grid pension plan appointed Russell Investments as the OCIO mandate; BlackRock was appointed by the insurance company AIG to manage up to US$150 billion in fixed income and private assets; British asset management company Schroeder ( Schroders announced a new £10bn task to manage the pension scheme of energy provider Centrica. In 2021, British Airways transferred £21.5bn of its two main pension plans to BlackRock, the largest such deal in Britain at the time.
Goldman merged its wealth management and asset management businesses last year, and the combined unit is now run by Marc Nachmann, a close friend of Chief Executive David Solomon. The U.S. bank is prioritizing growth in its asset and wealth management businesses, which offer more predictability and stability than its core investment banking and trading activities.
The rise in long-term interest rates has led to a marked improvement in the funding position of the UK defined benefit pension sector. According to consultancy XPS, the DB pension scheme had a total funding surplus of 113% at the end of August, with assets of £1.42bn and liabilities of £1.26bn.
Additional reporting by Chris Flood in London
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