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IPE special report May 2018

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CFOPS rebuilds from top down

At the beginning of next year the Construction Federation Operatives Pension Scheme (CFOPS) will launch a completely redesigned pension scheme. Key aims are simplification of the existing structure, greater control by trustees over asset allocation and an improved level of benefit for the scheme’s members.
CFOPS was set up in 1965 by the Construction Industry Federation to provide a top-up pension for the employees of Ireland’s building industry.
Due to the casual nature of employment in the construction industry only 65,000 of the scheme’s total membership of 270,000 are active; the rest have deferred benefits.
The new scheme has a target benefit which, when combined with the state pension, will represent two thirds of what scheme administrator Pat Ferguson describes as a “notional” industry average salary. “It is similar to a defined contribution (DC) scheme with bits bolted on to provide some kind of guarantee for the future,” he says.
The value of the fund stood at E439m at the end of last year and E362m at the end of 2002. The funding level has never fallen below 100%; before the stock market crash the funding level stood at between 120 and 125%. At present the funding level stands at around 101% based on the principle of the scheme being wound up and having to pay its obligations immediately, as required by the funding standard.
Asset allocation has remained fairly stable over recent years. At the end of the first quarter of this year, 68% of the fund was invested in equities compared with 70% three years earlier. However, the stock market crash did have an impact on allocation: the proportion of equities dipped to 57% in March last year as the market was beginning to recover; fixed income took up the slack. Irish equities represent 15.9% of the portfolio in compared with 24% back in March 1999.
The fixed income part of the portfolio consists of both government and corporate bonds. Corporate bonds have a minimum credit rating of AA-. While bonds with a lower rating are acceptable, the manager must secure approval from the CFOPS board. Bonds that are below investment grade are not considered.
CFOPS is unusual among Irish pension funds in view of its relatively high allocation to real estate. The reason is clear. “Our board has an in-depth knowledge of property,” explains Ferguson. Currently real estate accounts for 12.7% of the total fund, compared with 11% in 2001. Of this 10.5% is in direct holdings and the rest is in unitised funds. “We may well increase our property up to 20% of the fund,” says Ferguson. Three quarters of this will be direct-held.
But will such a high proportion in real estate compromise liquidity, such an important attribute of many pension funds? “Liquidity doesn’t bother us because of the young profile of the fund,” says Ferguson. “Contribution income is E60m per year and this is set to increase dramatically with the new scheme. This compares with only E10m is paid out in pensions.”
One of the tools CFOPS uses to diversify risk is a deliberate strategy of using one more conservative and one more aggressive manager. Equities account for 76% of the less aggressively managed portfolio and 83% of the more aggressively managed one, with the remainder of each in fixed income. An equal amount of money is placed with each manager.
In 2003 the fund returned 12%; in 2001 the fund lost 15% of its value. During the downturn one of the main problems that CFOPS experienced was a lack of control over asset allocation. “You can’t tell a manager with a balanced mandate to change the allocation to equities because he is responsible for the return,” says Ferguson.
It is due to this that CFOPS is reengineering the management of its assets: out go balanced mandates, and in come new specialised mandates. There will be a set of separate ring-fenced funds, one for equities, one for an indexed fund, one for real estate and one for fixed income. Each will have its own dedicated manager.

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