If it isn’t broken, why fix it?

Judge’s comment: “A strong focus on liabilities, a dynamic investment process and impressively high returns, given its low risk budget.”

In 2006 Trafalgar House Pension Trust (THPT) faced a stark choice. Left without a sponsor capable of making significant contributions, it either had to engage with the UK’s Pensions Regulator about either entering the Pension Protection Fund or continuing with the aim of eliminating the deficit over time so that the members’ benefits could be paid in full. 

With the agreement of the regulator, THPT chose the latter course and thus decided to adopt a radically different approach to the management of its assets. The transition to the new arrangements was completed by the middle of 2008.

The first step in establishing the new strategy was to calculate the required return. THPT had been closed to future accrual for some time, so calculating the return it needed to make from its investments was straightforward. The result is expressed as the excess return over the liability return, which is the change in the present value of the liabilities, calculated using market-based swaps and excluding any benefits that have already been paid. THPT’s overall objective is to achieve a return on investments of 3.5% per annum above the liability return after all fees. This liability-based objective is used for all performance analysis and risk assessment.

The next step was to adopt two key risk principles:

  • The level of risk is generally to be no higher than is necessary to achieve the performance target
  • Risk is only to be taken where the excess return is sufficient to compensate for the risk.

To reflect this, the scheme’s assets are now split into two distinct areas:

  • Liability managed portfolio: this comprises inflation and interest rate risks and should produce a return over time that broadly matches the liability return. This portfolio is predominantly invested in cash, swaps and Gilts.
  • Returns portfolio: here THPT takes most of the investment risk and invests in a wide range of assets that respond in different and often contrarian ways to different economic conditions. This is designed to limit the negative impact on the scheme of short term underperformance of any one asset class. Most of the assets in this portfolio are in actively managed funds, but THPT uses passive vehicles when necessary, for instance to maintain market exposure before assets can be allocated to an active manager or to achieve efficient changes in market exposure.

Both the asset classes and individual managers are closely monitored over time, and both can be adjusted in the light of changing economic conditions and outlook.

Risk models and risk budgets form part of the management of the portfolios and both are considered at each monthly meeting. As the long-term strategy was explicitly designed with the objective of returning the fund to full solvency and this remains on track, THPT has not felt the need to amend its strategy in any meaningful way since 2008.

Moreover, THPT fully expects to have the same strategy and long-term objectives in three to five years time, and it will continue to manage the portfolio in a dynamic and active manner to take advantage of new investment opportunities and techniques as they present themselves, without any fundamental impact on its strategy or objectives. The one exception to this is that with continued success, THPT envisages that it will able to further reduce risk by gradually increasing its allocation to the liability managed portfolio.

Trafalgar House Pension Trust

United Kingdom

Founded in current form in 2008

Defined benefit corporate fund


  • retirees: 13,179
  • deferred: 10,696

Assets: €2.2bn


  • one year: 23.8%
  • three years: 9.8%
  • five years: 14.4%

Quick facts:

  • Unchanged long-term strategy since 2008 based on liability return
  • Solid 23.8% investment performance in 2014
  • Performance seeking assets invested in actively managed funds


  • Bosch Pensionsfonds AG Germany
  • British Steel Pension Fund United Kingdom
  • FRR France


  • Jeroen De Soete
  • Angela Docherty
  • Michel Salden

Gold: Best European Pension Fund - British Steel Pension Fund