Thinking outside the box

Judge’s comment: “An interesting starting point, working on an improved governance structure prior to entering into a new and more complex alternatives strategy.”

The €3.4bn Merchant Navy Officers’ Pension Fund (MNOPF) faced complex investment challenges in the late 2000s, including a significant deficit, a rapidly maturing fund and a traditional asset allocation structure not really geared to its longer-term needs. Recognising the need for change led to a fundamental reassessment of the scheme’s governance and investment management arrangements. The resulting structure includes greater use of specialist managers and investment in alternatives.

Driving MNOPF’s investments is the journey-plan concept that it adopted at the time of the review. This describes how the funding position is expected to develop over time and provides a basis against which to measure progress and identify triggers for timely discussion on investment and derisking opportunities.

With clearly defined responsibilities and accountabilities, the fund developed an investment decision-making model that allows for holistic journey-plan management, portfolio construction and dynamic decision-making, adding value through manager selection, asset allocation and benchmark selection. The new decision-making approach was crucial to the development of the alternatives portfolio.

Whilst MNOPF already had exposure to alternatives, historically this had been through funds of funds or multi-strategy providers. This approach was inevitably somewhat limited in scope and, in some instances, merely capturing market beta at very high fee levels. The trustee thus developed a strategy to review, restructure and extend the alternatives portfolio to place a particular focus on risk diversity, rather than just asset diversification, to generate pure alpha and to reduce overall management fees in its alternatives portfolio.

The alternatives investment strategy now focuses on achieving funding objectives. The efficiency of the strategy means that targets are being hit with considerably reduced volatility compared to a traditional asset allocation, in addition to reduced exposure to economic shocks, such as a substantial fall in equity valuations or an increase in liability values. This significantly expanded use of alternatives is a testimony to the success of the fund’s new governance model.

Thanks in large part to the successful implementation of both its specialist managers and its new alternatives approach, MNOPF’s performance has been strong, posting outperformance of 3.3% over its liability-based benchmark since the last valuation in 2012, and 3.1% in the past year or so. Moreover, the scheme’s investment risk has more than halved, without a significant change in forward-looking return expectations. The use of alternatives, including smart beta, has increased substantially. Specifically looking at the contribution of alternative strategies, the one year performance in each area to 31 March 2015 breaks down as follows:

  • Private Equity: this is an ongoing programme of about three commitments per year that has added direct mid-market US buy-out, European buy-out, global distressed funds and UK conversion of commercial to residential property. The return over the period was 22%.
  • Infrastructure: this includes the addition of a manager to provide liquid exposure to the market through a listed vehicle as well as renewables and Japanese solar in response to events at Fukushima. The return totalled 20%.
  • Property: MNOPF replaced its UK core property manager with a higher conviction manager and diversified the exposure with allocations to global and Asian REITs, generating a 24.5% return
  • Hedge Funds: the scheme appointed nine direct managers for strategies including credit long/short, multi-strategy fixed income, CTA and variable-bias in developed market equities. This portfolio’s performance amounted to 14%
  • Currency: recent developments include the introduction of an emerging market fund and this segment produced a return of 12%
  • Reinsurance: MNOPF recruited a specialist manager for catastrophe bonds and other insurance-linked instruments, leading to a return of 17%

Finally, the alternatives portfolio is complemented by the addition of several smart-beta specialists for commodities, volatility and carry premia.

2014 Essentials

Merchant Navy Officers’ Pension Fund

Founded in 1938

Defined-benefit industry-wide pension fund


  • active: 695
  • retirees: 16,578
  • deferred: 9,214

Assets: €3.4bn


  • one year: 24.7%

Quick facts

  • Redesigned governance created diversified and streamlined alternatives portfolio
  • Solid outperformance from individual alternative classes
  • Alternatives include various smart-beta strategies


  • Ärzteversorgung Westfalen-Lippe Germany
  • Pension Protection Fund United Kingdom
  • SEB Pension Denmark


  • Stephan Lods
  • Neil McPherson
  • Alvaro Molina
  • Nick Motson