Santander fund may lower investment risk as deficit declines by half

Santander’s UK group pension scheme is reducing its funding deficit faster than planned and is now in a position where it could even lower its level of investment risk, according to the company’s pensions chief.

Reporting its financial figures for the six months to the end of June, Santander UK said the accounting deficit of the over £8bn (€10bn) Santander UK Group Pension Scheme had narrowed by £381m in the period.

This was partly driven by positive asset returns but also the result of a £218m net gain arising from scheme changes to limit future defined benefit pension entitlements, it said.

The net DB obligation — or funding deficit — was stated at £173m, down from £554m at the end of December 2013.

Antony Barker, director of pensions at Santander UK, said: “Our target returns have fallen and the funding level at risk has declined.

“We don’t need to take as much investment risk now, and we should still be able to deliver on the initial plan,” he said.

However, the trustee funding deficit differed from the net DB obligation stated in the corporate accounts because of the type of bonds used to calculate it, he pointed out.

Since 2012, when Barker joined Santander and the pension scheme — which was consolidated out of six legacy schemes — the trustee funding deficit had now narrowed to between £900m and £1bn, from around £1.2bn two years ago, he said.

Back then, a 10-year strategy was put in place to get the scheme to a fully-funded position, which included a target return of 6.25% over the period.

Since the scheme was now slightly ahead of its plan, the return needed to stick to that timescale had dropped to between 5.5% and 5.75%, Barker said.

“Investment performance has been consistently delivering,” he said, adding that the pension fund had made some significant gains on property in the last 12 months, having benefited from quick wins on some of these investments in terms of early sales.

The hedging strategy had also done well to control sources of volatility, facilitating the use of return-seeking assets, and private debt investment — which the fund has invested in for some time — had also contributed well to investment results, he said.

Looking ahead, Barker said the investment team would largely continue its current strategy which would include finding misplaced assets to invest in.

“We will probably be placing about £1bn in real estate and illiquid assets,” he said, given that public markets appeared to be highly valued and there expectations of rising interest rates were prevalent. 

In its interim report, Santander UK also said the latest triennial trustee funding valuation at 31 March 2013 had been agreed and after this, an updated schedule of deficit funding contributions had been agreed with the scheme trustee.