In November 2010, the Board of the Pension Protection Fund published its latest ‘Statement of Investment Principles’. The 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 Management
The Pension Protection Fund has appointed 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.
Global bonds: Goldman Sachs Asset Management, Mondrian Investment Partners Limited, PIMCO, Rogge Global Partners Plc
Global equity: Arrowstreet Capital, Legal & General, Longview
UK bonds and derivatives (LDI): Insight Investment
Private equity: Lexington Partners, LGT Capital, Pantheon, Partners Group
Alternative credit: Avenue Capital, BlueMountain Capital Partners, GSO Capital Partners
Infrastructure: Meridiam Infrastructure
Real estate: Aviva Investors, LaSalle Investment Management, Legal & General (REITs)
GTAA: Cantab Capital, Winton Capital, Neuberger Berman
Our fund managers were appointed following a comprehensive and detailed selection process. Their performance is reviewed regularly by the Board’s Investment Committee.
The PPF also appoints panels of additional fund managers that are currently not funded, allowing the PPF flexibility to take advantage of market opportunities as they arise:
Global Equity: Investec Management, Lazard Asset Management, MFS International (UK) Ltd, RCM (UK) Ltd, Sarasin & Partners LLP
Private equity: Goldman Sachs, Hamilton Lane, DB Private Equity
Alternative Credit: Apollo Management, Ares Management, Intermediate Capital Group, Muzinich & Co., Oaktree Capital, York Capital Management
Infrastructure: AMP Capital Investors, Barclays Private Equity, Brookfield Partners, Global Infrastructure Partners, M&G, Partners Group
Real estate: Aberdeen Investors, CBRE Investors, Invesco
GTAA: Aspect Capital, Bluecrest Capital, QS Investors
Transition Management
The PPF appointed a panel of nine Transition Managers to its panel in October 2011.
A large panel has been set up to offer as much flexibility as possible when transitioning pension scheme assets to the PPF. This new panel also gives the PPF the opportunity to make structural portfolio and manager changes when required. Those appointed were:
Blackrock, BNY Mellon, CitiGroup, Credit Suisse, Goldman Sachs International, JP Morgan, Legal & General Investment Management, Morgan Stanley and Russell Investments.
PPF Investment Objectives
The 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 1.8 per cent pa.
The Board of the Pension Protection Fund has agreed a risk tolerance of 4 per cent pa of liabilities. This is significantly less than the 10-12 per cent risk budget of most UK DB pension schemes and reflects the conservative investment approach.
The Fund targets the following asset allocation:
Cash and Bonds
- Cash
- UK Gilts
- Global Government Bonds
- Global Aggregate Bonds
(including credit)
|
70 per cent |
65-80 per cent |
3-month Libor
FTSE Gilt All Stocks
JP Morgan Government Bond
Barclays Global Aggregate Bond |
Public Equity
|
10 per cent |
5-20 per cent |
FTSE All-World Index
|
Alternatives
(including property) |
20 per cent |
10-25 per cent |
Will vary according to the asset class |
A portfolio of swaps, bonds and cash is applied to the above portfolio as 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.
Alongside the strategic asset allocation the Board permits some tactical views to be taken to either enhance return or control risk and such positions operate within the overall 4% risk tolerance set by the Board
Levy benefits and risks
An 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 1.8 per cent 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 derivatives
The 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. Other derivatives may be used from time to time as protection strategies ot mitigate the risk of a fall in assets.
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 Considerations
A 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.
Responsible Investment
The PPF’s Board and its Investment Committee have made a commitment to responsible investment across all asset classes and markets we invest in, by adopting the beliefs that:
- By acting as a responsible and vigilant asset owner and market participant, we can protect and enhance the value of the Fund’s investments;
- Environmental, social and governance (ESG) factors can have an impact on the long-term performance of the PPF’s investments, and the management of ESG risks and exploitation of ESG opportunities can therefore add value to our portfolio.
In setting these beliefs, our primary concern is to act in the best financial interest of our beneficiaries, by seeking the best return that is consistent with a prudent and appropriate level of risk.
We employ a responsible investment manager to develop and implement our responsible investment strategy.
The full text of the RI principles can be found in our ‘Statement of Investment Principles’.
Responsible investment across all asset classes
From our core beliefs flows the commitment to the integration of ESG considerations across all asset classes and markets in which we invest. Our asset-class specific responsible investment policies explain how:
- our responsible investment principles will be applied in each asset class, and by whom. As the PPF outsources the management of its fund to external fund managers, we expect of them appropriate awareness and management of ESG risk associated with our portfolios. For our listed equity portfolio, we also employ the services of an external voting and engagement advisor in order to discharge our stewardship responsibilities.
- the consideration of RI factors influences selection and appointment of fund managers. The PPF will seek appropriate exposure to fund managers whose RI practices are closely aligned with the PPF’s policies on responsible investment.
- the PPF holds its fund managers accountable for their RI practices and performance. We consider their RI philosophy, alignment with the interests of the PPF, the degree to which they integrate ESG considerations into investment analysis and decision-making, their stewardship practices and resources dedicated to responsible investment. The weight assigned to each of these performance areas varies by asset class.
Global voting and engagement
The PPF is committed to exercising its ownership rights, including voting rights, in order to safeguard sustainable returns in the long-term. In order to do so cost-efficiently across a growing global listed equity portfolio, the Fund appoints external agents to vote the Fund’s shares, to monitor portfolio companies for ESG risks, and where concerns arise, to engage with company management on these concerns.
For its segregated portfolios, it uses an overlay service (currently F&C’s reo® service). Due to operational barriers to extracting voting rights from its pooled funds, the Fund outsources stewardship activities in relation to these funds to the relevant managers. The PPF monitors its voting and engagement agents throughout the year, including their level of compliance with the UK Stewardship Code, and works with them to improve the quality and quantity of their stewardship activities globally.
The Board may act itself on concerns or amend votes where necessary. However, it is generally satisfied that its voting and engagement agents have suitable expertise, policies, research and resources to carry out stewardship activities on a day to day basis, and will therefore generally refrain from influencing their activities in individual cases. Instead, the Board engages them in areas where it considers that their policies or processes need to be better aligned with PPF policy. By doing so, it minimises any conflicts of interest such as those that may arise where the Fund’s shareholding in listed companies coincides with its duty to protect the pensions of the members of those companies’ pension funds.
The PPF strives to be transparent on its responsible investment activities. The reports below provide information on the voting and engagement activities carried out on behalf of the PPF on its segregated portfolios. The PPF is working towards disclosing information on activities on its holdings in pooled funds.
The UK Stewardship Code
The PPF has published its Statement of Compliance with the UK Stewardship Code. This Code, adopted by the Financial Reporting Council (FRC) in July 2010, aims to improve the quality of engagement between investors and companies to help maximise long-term returns to shareholders as well as improve and strengthen corporate governance.
The PPF is listed as a signatory to the UK Stewardship Code on the FRC’s website.
Working with others
We have been a signatory to the Principles for Responsible Investment (PRI) since 2007. The PRI are set of principles that build a framework for global best practice in responsible investment. They were developed by a global initiative with backing from the United Nations.
The PPF achieved top quartile performance on 4 out of 6 PRI principles in the 2009 assessment against its peers.
PPF is also a signatory to the Carbon Disclosure Project (CDP) and its offshoot, CDP Water. We are also involved with the International Corporate Governance Network (ICGN).