Keeping it in the family

Judge’s comment: “A very convincing entry practically setting the standard in defined-benefit asset liability management and overall investment governance”

The €19bn British Steel Pension Fund (BSPF) was established in 1969 and has continued to be managed since in a similar manner to the way it is today. Until 31 March 2007, the performance of the fund was measured against peer group benchmarks. But in light of the increasing maturity of the scheme and the risk appetite of its trustees, it decided following a thorough asset liability study to adopt a scheme specific benchmark that more closely reflected the profile of the liabilities and substantially reduced the asset-liability mismatch.

This has proved to be a shrewd move, and the fund has matched its target by recording outperformance since adopting the scheme specific benchmark of 0.5% per annum. This internal benchmark has in turn outperformed the State Street/WM50 Universe of larger UK pension funds by over 1.2% per annum since its creation, while the fund has remained in the top-performing quintile within the WM50 Universe for the last 10 years. Moreover, its risk-adjusted return based on the Sharpe ratio model is the highest in the All Funds Universe over 10 years. Running an exclusive internal investment management unit plays a significant role in this success.

BSPF’s captive asset manager, Pension Services Ltd (PSL), employs a team of 32 staff, who are all contributing members of the scheme, participating on identical terms with the broader membership. PSL manages only one account and focuses entirely on investment management. PSL therefore does not undertake any sales, marketing, client relations or other activities unrelated to managing the investments of its sole client and 100% owner – British Steel Pension Fund. 

Members of PSL’s investment team are compensated according to a balanced scorecard methodology which is highly meritocratic. This is based on trailing one and three-year relative returns versus the scheme specific benchmark and underlying market indices calculated from independently verified performance figures together with daily compliance with predetermined risk parameters. Given the sharply meritocratic nature of the incentive system, outperforming individuals tend to stay with the firm, delivering longer term benefits for British Steel Pension Fund.

The market index outperformance basis of the incentive framework, as distinct from a peer group based system, also helps to ensure a complete alignment of interest between the investment manager and the scheme and its members. PSL does not pay bonuses in the event that investment team members do not exceed market index returns, irrespective of any outperformance relative to the peer group.

Transaction costs represent a drag on performance and therefore PSL will not enter any deals it doesn’t need to. Any costs of outsourcing investment management to third parties are also a drag on performance and PSL optimises these by factoring them into actual investment returns. The average cost over time of managing BSPF’s investments as a percentage of total investments is approximately 6bps or around £63 per scheme member per annum. This is very much towards the lower end for the pension industry. The certain, persistent and compounding effect of this cost efficiency has contributed significantly to the ongoing financial and operational robustness of the scheme.

BSPF has been significantly de-risked and appropriately re-risked in a very timely manner in recent times, which has contributed significantly to the fact that it has posted the best risk-adjusted return over 10 years within the State Street/WM All Funds Universe of UK pension schemes, also beating the scheme-specific benchmark it adopted eight years ago. This puts BSPF in an enviable position as it is much better placed to withstand equity volatility and heightened inflation in the future.

Essentials to March 31 2015

British Steel Pension Fund

Founded in 1969

Defined benefit corporate pension fund


  • active: 16,075
  • retirees: 86,071
  • deferred: 32,559

Assets: €19.3bn


  • one year: 14.6%
  • three years: 9.4%
  • five years: 9.1%
  • ten years: 9.0%

Quick facts

  • Successful adoption of scheme specific benchmark with 0.5% outperformance per annum
  • Wholly-owned captive investment manager with full alignment of interest
  • Bonus structure based on market index returns


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