The £12.7bn (€15.2bn) British Steel Pension Fund has seen its fund value fall by 2% over its last financial year despite equities providing it with positive investment returns.

Almost two-thirds of the fund’s membership are pensioners, as it paid out more than £589m in benefits in the year to April.

Despite strong returns on equity markets, income from investments did not cover the fund’s pensions expenditure, with it offloading holdings in its fixed income and equity portfolios.

The fund began as an offering for the British Steel Corporation, a nationalised steel-manufacturing firm privatised in 1988.

Tata Steel now sponsors the fund after its takeover of the privatised firm in 2007.

It held a deficit of £1.2bn at the end of March 2013 based on annual actuarial valuation but has now begun its triennial valuation on the March 2014 funding status.

Writing in the fund’s annual report, chair of trustees Allan Johnston said preliminary findings for the valuation were expected soon but unlikely to yield positive news.

“The challenging economic conditions faced by all defined benefit pension schemes mean the scheme’s long-term obligations to pay pensions are likely to have grown faster than the assets,” he said.

The fund’s last triennial valuation in 2011 revealed a £553m deficit, the first time the scheme was underfunded on an actuarial basis.

It closed to new members in April this year and saw its value fall £267m to £12.7bn over the year with the bulk of redemptions coming from its fixed income assets and index-linked holdings.

In a bid to boost investment income, the fund’s internal investment management team increased allocations to real estate holdings and alternative investments.

Despite the fall in value, the fund did make a positive net return on its investments of 1.6%.

This return came on the back of strong equity returns that offset losses on the fund’s bond holdings, which account for the majority of assets.

Index-linked securities accounted for 42% of the fund but provided a negative return of 3.8% over the year.

Similarly, its 21% holding of UK Gilts and corporate bonds produced a loss of 2.6% and return of 1.6% over the year, respectively.

Its 8.1% allocation to UK equities returned 8.8%, while the 16.4% allocation to overseas equities sae benchmark returns 11% (US) and 18.3% (Europe).

Japanese holdings had benchmark returns of 18.6%. However, due to currency fluctuations, it led to a 1.4% fall in sterling terms.

The 7% allocation to real estate experience benchmark returns of 13.3% as the fund increased its holdings to 8.3% by year end.

Despite its maturing membership, it looked to take advantage of rising equity markets by increasing allocations to UK equities by 70 basis points and overseas holdings by 50bps.

Index-linked and fixed income exposures were both reduced by 1.4 percentage points.

In April, new members began accruing benefits in a defined contribution (DC) arrangement run by Legal & General.

Assets in the DC section grew to £809,000, with overall net investment returns of 5%.

This was backed by Legal & General Investment Management’s global equities fund returning 12.6%, accounting for 80% of assets.


This article was amended to correct errors relating to the fund’s expenditure on benefits, loss in value and return percentages