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PPF expands global equities portfolio by 17% as net assets rise 9%

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The UK Pension Protection Fund (PPF) has expanded its global equity portfolio in a year that saw the asset class return 19.5%, as its monetary surplus also increased.

The PPF acts as a lifeboat fund to UK defined benefit (DB) schemes stranded through sponsor insolvency.

Historically, it has avoided equity investments due to risk duplication but now allocates 6.9% of its portfolio compared with 5.6% a year previous.

Chief executive Alan Rubenstein said the fund’s global equity portfolio was key to its outperforming its liability benchmark by 2.9% over the year to 31 March.

Despite benchmark outperformance and an increase in net assets – through new schemes entering the PPF and levy collections – investment returns were a negative 0.7% due to the lifeboat’s exposure to liability-driven investment (LDI) strategies.

Its investible portfolio reached £16.3bn (£20.6bn), up from £14.9bn in 2013, with actuarial liabilities of £12.9bn.

However, the fund operates a large LDI book, and an increase in the yield of government bonds saw its liability projections fall and thus also a reduction in the value of LDI instruments.

Investment returns, stripping out the LDI portfolio, was 3.4%.

Over the year, the PPF made further allocations into debt instruments, money markets, private equity and infrastructure, making its first foray into farm and timberland through asset transfers and active allocation.

It also reduced exposure to sovereign debt.

Earlier this month, the PPF announced an amendment to its investment strategy allowing it to shift away from derivatives in the face of the European Markets Infrastructure Regulation (EMIR) and the lack of counterparty competitiveness.

It will now look towards a more liberal asset allocation policy looking for liability hedges and outperformance.

Overall, the lifeboat’s funding position increased to 112.5% compared with 109.6%, and it now runs a surplus of £2.4bn.

Rubenstein said the fund had begun to benefit from a wider economic recovery as fewer claims were made in 2013-14 after a record number a year earlier.

The PPF said its aim of reaching self-sufficiency by 2030 was now 90% certain, up from 87% at the end of last year.

The fund’s self-sufficiency aim is to hold assets to match liabilities, with a 10% margin to cover longevity and future claims risk.

The fund also said it would conduct an ‘own risk and solvency assessment’ (ORSA) in the coming year.

ORSA, a term and strategy lifted from Solvency II regulations, will see the PPF clearly identify risks, assess potential impacts via stress testing and consider additional capital requirements.

Despite resistance to being classed as an insurance company, the PPF said its funding margin was designed to cover the costs of unexpected risk, and a core part of the risk management framework.

The fund’s compensation payments from 2005 to date rose to more than £1bn, with one-third being paid in the last year.

On the announcement of its results, PPF chairman Lady Barbara Judge said the lifeboat continued to “sail smoothly” towards self-sufficiency.

“There are signs the upward trend in the economy will continue, and we expect further improvement in our risk profile,” she added.

“There are many challenges remaining. Our focus continues to be on maintaining stability in the face of ongoing uncertainty.”

Overall, the fund’s levy intake fell over the year, bringing in £577m compared with £644m in 2012-13.

The PPF is currently considering amendments to its new levy forumla as it looks to replace current risk-score provider Dun & Bradstreet with Experian.

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