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Bank of England scheme pre-empted crisis

UK - The Bank of England Pension Scheme appeared to almost pre-empt the financial crisis of last year as it returned 12% in the year to February 2008 and reduced equity holdings so it could invest in index-linked gilts.

Figures from the last pension fund report for 2008 showed by the beginning of last year the value of the fund had increased £247m to £2.2bn (€2.36bn), resulting in a shift from a £22m deficit to a £404m surplus, on an IAS19 basis.

The new investment strategy, designed to “provide the highest possible degree of certainty, both for members and the Bank, and to minimise the impact of future changes in interest rates, security prices and inflation on the financial position of the fund,” comprised primarily of liquidating equity holdings and investing in index-linked gilts.

In the 2008 report, the Bank of England confirmed the liquidation of the equity portfolio was “largely completed during the first half of the year [2007]”, while other less liquid investments such as corporate bonds, property and private equity, “are also being progressively sold and the proceeds similarly reinvested”.

It added once the transition to the new portfolio is completed “it will consist entirely of government-guaranteed assets”, with the aim of the cashflow matching expected liabilities so that “future dependence on market prices of securities will be very much reduced”.

Figures from the annual report showed between February 2007 and February 2008 the pension fund’s equity holdings were cut from 21.6% to 0.1%, while investment in equities through pooled investment vehicles was also significantly reduced, and investment in index-linked gilts instead rose from 25.6% to 70.7% - more than tripling from £504.2m to £1.56bn.

Despite the equity sell-off and the move into bonds the fund recorded an investment return of 12%, while investment income for the year to February 2008 was £58.95m, only £1m below the £59.95m achieved the previous year.

In the pension fund update 2008 - a summary of the annual report issued to members - Alistair Clark, chairman of the investment sub-committee, stated: “The shift to a liability matching strategy based on index-linked gilts means a significant change in the fund’s risk-return balance, but one which reflects more accurately the Bank’s overall risk preferences while at the same time maintaining the position of fund members.”

The report also highlighted the closure of the existing final salary scheme to new members in September 2007, in favour of a career-average earnings scheme; the merger with the Court Pension Scheme in July 2007 and the appointment of Legal & General as the fund’s investment manager.

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com

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