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NAPF Conference: ESPS’s Barlow on bonds

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UK - The idea of pension schemes just getting into bonds and gilts seems "crazy" to Electricity Supply Pension Scheme chief executive Richard Barlow.

According to Barlow, moving into bonds and gilts against the backdrop of historically low yields "seems like just about the worst thing ever", especially when compared with the performance of asset classes such as equities and property.

However, emphasis on the short-term by, amongst others, regulators and accounting standards was "also leading to an anti-equity culture". He was speaking at the annual National Association of Pension Funds’ investment conference in Edinburgh.

Barlow told the event it was not a good time to buy long-dated bonds as it crystallises liabilities and increases burdens on schemes.

The trend has been described by some as "like giving a pyromaniac a can of petrol", said Barlow.

NAPF investment council chairman Chris Hitchen told delegates yesterday that the flight to bonds was a short-term measure.

Speaking on the sidelines of the conference today, Barlow said: "That's not to say don't go into bonds or gilts" but there is a need to have a balanced investment portfolio, which suits the needs of each scheme.

While he labelled corporate bonds an "important asset class", he also warned that a "combination of prudence by_schemes can become too prudent".

"We don't have to nanny people," said Barlow. Instead, the government should give trustees "room to breathe and make their own decisions...They must also realise that investment and risk go hand in hand."

He added that schemes should not follow the pack, and instead realise the benefits of diversification.

He stated that assets do eventually need to meet liabilities, and liability driven investing is the answer if it involves a balanced, flexible approach.

However, he explained: "Bonds and gilts are obviously part of the answer but not THE answer."

The £20bn Electricity Supply scheme is a two-tier scheme - an umbrella embracing roughly 20 schemes, each with the freedom to decide its own strategy. Barlow stated that some are exiting equity "to a degree" and moving into bonds and gilts.

However, he added it was important to remember that approximately a two-thirds of investment portfolios are still in equities.

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