Ros Altmann, consultant and a trustee of the Trafalgar House pension scheme, said she hoped the approach would become a model for schemes eager to shrink their deficits.
The scheme’s assets have been split equally between a liability matching portfolio and a returns portfolio.
As many inefficiencies in investment markets as possible are exploited in the strategy, which does not rely on long-only equities and the equity market risk premium.
The liability portfolio is invested in global bonds, index-linked gilts, cash and swaps.
In addition, the return-seeking portfolio is invested in hedge funds (16%); active currency (4%); private finance initiatives (PFI) and infrastructure (2.5%); emerging market debt (1.5%); private equity (6%); niche property funds (5%); and unconstrained global equities (15%).
The strategy targets an annual return over liabilities of 3.5% and uses 33 different investment managers to aid diversification.
“The main point for trustees and the Pensions Regulator is that the downside risk is controlled relative to liabilities,” said Altmann. “We continually monitor and control the risk relative to the liabilities, but if the strategy doesn’t work the scheme shouldn’t end up in the Pension Protection Fund with a much bigger deficit than it would have had without the new approach.”
An investment expert with working knowledge of the scheme said the asset allocation and portfolio was at the leading edge of investment thinking.
“The scheme has been less susceptible to market downturns,” he said. “It has not increased the level of volatility or risk to the fund. It’s a model the scheme is proud of.”
Tom Willetts
