UK - The UK Pension Protection Fund (PPF) reported a return of 13.4% in the year to March 2009, although this was primarily driven by the success of its swap portfolio overlay.

Part of the negative performance delivered, had there been no swap overlay, means key bonds manager PIMCO has been placed under review.

Figures from the PPF’s annual report and accounts for 2008/9 acknowledged that without the swap overlay, which earned £318m (€354m), the return on the organisation’s investment portfolio would have been -3.4% over the year against a target return of 6.2%.

Alan Rubenstein, chief executive of the PPF, said: “We have benefited from our sophisticated hedging strategy which resulted in the growing portfolio achieving a return of 13.4% on our invested assets.

“Our priority remains to maximise returns on our investments but without taking undue risk to make sure we continue to fulfil our obligations to our members,” he added.

The PPF’s portfolio is split between matching assets - the LDI swap portfolio - and return-seeking assets which include a 50% allocation to fixed income, 20% to equities and 7.5% in property. During the course of the year it also switched from an active currency overlay to a 2.5% allocation to Global Tactical Asset Allocation (GTAA).

However, while the PPF noted that five of the fund managers had been in place for all 12 months had met or exceeded the benchmarks, its two global government bonds managers - Goldman Sachs Asset Management and PIMCO - both underperformed their targets.

The report noted: “Both GSAM and PIMCO underperformed their benchmarks, in the case of PIMCO substantially so. This was sufficiently serious to warrant a formal review, following which it was decided to maintain PIMCO’s appointment on a provisional basis.”

The report said PIMCO produced a return of around 0.5% against a benchmark of just below 2%, while GSAM returned approximately 1.5% against a similar benchmark. This is based on annualised performance weighted to reflect actual asset allocation.

A spokeswoman for the PPF added: “While all of our managers are subject to continual appraisal, PIMCO will be subject to another review meeting in March 2010.”

Despite this, the report showed the investment portfolio of the PPF almost doubled from £1.47bn to £2.93bn, although the majority of this gain came from the receipt of £1.26bn of assets from levy payments and transferring schemes, with just £217m resulting from investment gains.

Commenting on the latest PPF report, Rash Bhabra, head of corporate consulting at Watson Wyatt, said: “In four years, the PPF has gone from a standing start to the point where it is already one of the biggest pension funds in the country. It will be hoping that it does not get a lot bigger quickly as the quickest way for the PPF to grow is for more employers to become insolvent and transfer their schemes’ assets and liabilities across. Getting too big too quickly could threaten the PPF’s viability in the long-term.”

 The annual report also confirmed that the PPF deficit increased from £517m to £1.23bn, while the funding level dropping from 91% to 88% - a move which it attributed to an “increase in the number, and an increase in the value, of claims” on the organisation.
However, Rubenstein claimed: “The lack of big claims and market improvements since March mean we estimate that, by the end of September, our deficit had fallen back below the £1bn mark and our funding ratio had returned to more than 90%. But we cannot afford to be complacent.”

Bhabra added that while a deficit of £1.2bn “will not sink the pensions lifeboat, there could be worse to come. The real question is how much bigger the deficit gets before the recession is out. Schemes which would fall back on the PPF if their employer became insolvent have combined deficits equivalent to 250 years’ levy income. If a significant part of that fell into the PPF’s lap, it would have a real problem.”

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email