Local authority scheme adopts £700m equity protection strategy

A London local authority pension fund has become the latest to adopt an equity protection strategy, covering roughly half its total investment portfolio.

The £1.4bn (€1.6bn) London Borough of Tower Hamlets Pension Fund appointed Schroders to run the £700m “risk management solution”, which was completed in September.

In a statement, Schroders said the move put Tower Hamlets “in a robust position ahead of the market volatility experienced in October and November”.

Steve Turner, partner at Mercer and adviser to the Tower Hamlets scheme, said: “The protection has already demonstrated its value in the recent equity market turmoil seen since early October, by helping insulate the fund from equity market volatility. Key stakeholders can sleep a lot easier with the strategy in place, while still retaining good levels of return upside.”

Neville Murton, acting corporate director for resources at the London Borough of Tower Hamlets, said: “This investment strategy provides more certainty around the outcome of the 31 March 2019 formal actuarial valuation and protects against the risk of a significant fall in equities given increased volatility in markets and concerns regarding stretched valuations. 

“[Tower Hamlets’] funding level has improved materially since the last valuation, so the fund implemented the equity protection strategy from a position of relative strength.  The strategy implementation was just in time to lock in high market levels before the recent market fall; therefore the strategy is in a good position to deliver additional savings.”

All 88 Local Government Pension Schemes (LGPS) in England and Wales will go through their triennial actuarial valuation process next year, based on asset prices on 31 March 2019.

Schroders said the mandate would maintain the pension fund’s exposure to equity market gains while “mitigating downside risk” and minimising trading costs.

The asset manager previously set up a £2.6bn equity protection strategy for the South Yorkshire Pensions Authority earlier this year, which Schroders said was one of the largest such strategies adopted by a local authority pension scheme.

Worcestershire County Council also made a similar move this year, appointing River & Mercantile Derivatives to run a £1.2bn protection mandate.