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InvestmentIn July 2008, the Board of the Pension Protection Fund published its latest ‘Statement of Investment Principles’. (please note, the changes between this version and the previous one are minorThe Statement sets out the Board’s principles and policies governing the investment of its assets, and demonstrates the Pension Protection Fund’s commitment to managing its assets effectively and appropriately to balance the interests of both levy payers and beneficiaries alike. Fund ManagementThe Pension Protection Fund appointed eight fund managers to oversee the day to day management of its assets. These assets comprise the pension protection levy proceeds, assets received from eligible pension schemes at the point they transfer to the Pension Protection Fund and recoveries from insolvent employers. The fund managers of the Pension Protection Fund are Insight Investment, PIMCO, Goldman Sachs Asset Management, State Street Global Advisors, Newton Investment Management, Lazard Asset Management, Morley Fund Management, and Auriel Capital Management. These fund managers were appointed following a comprehensive and detailed selection process. Their performance is reviewed regularly by the Board’s Investment Committee. The fund managers invest the assets of the Pension Protection Fund in cash, bonds, equities, property and currency. PIMCO and Goldman Sachs Asset Management manage the Pension Protection Fund’s global bond portfolio. State Street Global Advisors and Lazard Asset Management manage UK equities and Newton Investment Management global equities. Morley Fund Management invests in property and Auriel Capital Management oversees currency investing. Insight Investment manages UK bonds and derivatives to match the future cash flows of the fund. PPF Investment ObjectivesThe primary objective of the Fund is to have sufficient funds to pay compensation to members of schemes that have transferred to the Fund. The Fund has set an investment strategy aimed at achieving a balance between protecting compensation payments for actual and potential members of schemes whilst setting a fair and proportional levy. This is achieved by adopting a bespoke liability driven investment strategy that targets an expected out-performance over the liability benchmark of 1.4%pa. The Board of the Pension Protection Fund has agreed a risk tolerance of 4% pa at the fund level. This is significantly less than the 10-12% risk budget of most UK DB pension schemes and reflects the conservative investment approach. The Fund targets the following asset allocation:
A portfolio of swaps, bonds and cash is applied to the above portfolio as a swap overlay to change the nature of the assets to mimic the expected liability cashflows. The asset allocation is markedly different from the allocations of average UK DB pension schemes. This is due to the need for a low risk strategy that aims to be relatively uncorrelated to the funding levels of the schemes it protects since the Fund needs to be solvent at times when general pension schemes are significantly underfunded. Levy benefits and risksAn investment strategy benchmarked against the liabilities where the use of swaps removes interest rate and inflation rate risk helps to reduce the volatility of valuation of assets relative to liabilities. This can benefit the levy payer by helping to achieve a smooth levy to be set in future. A low risk investment strategy also reduces the volatility of asset returns. Seeking outperformance of 1.4%pa over the liabilities provides some value for the levy payer and also provides a cushion against the residual risks the Pension Protection Fund faces. These risks are the longevity risk associated with the mortality assumptions underlying the expected liabilities not being borne out in practice. The Fund is at particular risk to the possibility of interlinked insolvencies of companies. The Fund seeks to mitigate this risk by limiting exposure to investments with high credit risk. Use of derivativesThe strategy is liability driven with a swap overlay on the nominal amount of the Fund’s expected liabilities. This swap overlay will remove the unrewarded risks of interest rate and inflation rates. Derivatives are used within the currency overlay portfolio. Currency overlay accounts for 2.5% of the portfolio and provides a source of pure alpha. Derivatives are also used to hedge currency risk in all other asset classes. Where appropriate, derivatives will be used in the transition of assets from the legacy portfolio of schemes entering the Pension Protection Fund to the assets required for the investment strategy. Benchmark ConsiderationsA bespoke liability driven investment strategy has been adopted to reflect the dynamic nature of the liabilities. The liabilities will change substantially over time as schemes enter into the Fund and as such the liability benchmark will need to be changed and rebalanced at least twice yearly to reflect this. An LDI framework provides a tailored investment strategy that helps manage the risks and conflicting needs of the Pension Protection Fund and provides a dynamic investment strategy to the dynamic liabilities and risks that the Fund faces. The PPF as a responsible investorOur approach With this in mind we have implemented a number of measures to ensure that ESG issues are considered across all of our asset classes, starting with UK equities. In doing this, our overriding objective is to continue to prudently and effectively manage our assets long into the future and to the benefit of all stakeholders, but especially our members who will benefit from PPF compensation. Major achievements Firstly, in early 2007, we signed up to the United Nations Principles for Responsible Investment (UN PRI) – a global initiative that encourages signatory investors to fulfil their long-term fiduciary duties by addressing material ESG issues in their investment activities and ownership practices. The UN PRI provides the PPF with a best practice benchmark against which to measure itself, and gives us access to a global network of investors working towards the same goal. More information on the UN PRI can be found on its website. Secondly, in September 2007 we created a new Responsible Investment Manager role. This role is currently held by Aled Jones who will be developing and implementing our RI activities. Aled has a strong track record working in the asset management industry with organisations boasting strong reputations in socially responsible and ethical investment. Thirdly, in summer 2008 we appointed F&C to provide voting and engagement services for our UK equity portfolio. They will also provide advice as we develop our RI policies, procedures and reporting. Focus of activities – UK equity We decided that a sensible starting point for our RI activities was to focus on UK equities. Once we have established our approach to this asset class, we will expand our RI activities to include other asset classes in our portfolio, e.g. global equities As part of our ongoing monitoring of fund manager performance, we conducted an in-depth review of the UK managers’ voting and engagement capabilities. This included benchmarking their corporate governance and voting policies against UK and international best practice guidelines, e.g. those of the National Association of Pension Funds (NAPF) and the Organisation for Economic Co-operation and Development (OECD) to ensure they were in line with our own expectations. We have also been working with our UK managers to obtain records of how they have exercised our voting rights. You can see a summary of these records for the last 12 months. We will continue to review and monitor the RI activities of our fund managers, building on this process. Future developments To ensure that our activities both reflect and influence wider market practice the PPF will be taking an active role in the wider debate on responsible investment. We will publish future developments on our approach to RI as well as other points of interest on our website as they happen. This will include regular voting reports and details of our ESG engagement activities. |
