Prior to his arrival at the Santander UK Group Pension Scheme in the summer of 2012, Antony Barker says it would be fair to describe the fund’s asset allocation as broadly comprising passive global equity and Treasury mandates. Faced with a fully priced equity market, the ‘new normal’ environment in fixed income and an 80% funding ratio that saw the sponsoring bank required to hold £3bn (€3.6bn) in capital for every £100m shortfall, a change in approach was needed.

Aided by a new in-house asset and liability model that examined all aspects of the defined benefit scheme, the director of pensions was soon able to present trustees and Santander’s management with a simple figure: a decade-long target return of 6.25%, that would allow the fund to stand on its own.

“It’s a 10-year strategy to get us into a fully-funded position overall, with a three-year kick-start to get the thing accelerating,” the former head of investment advisory at JLT Pension Capital Strategies says, careful not to present the new asset allocation as a rigid, even binding framework. “When the motor is running, we can then start a gentle hand on the tiller to refine the things and trim the individual sails.”

The new asset allocation, swiftly implemented over the course of 2013 to help achieve the target return, has allowed Barker to avoid what he deems “very, very risky” investments. Casting off the hedge fund holdings and with a new emphasis on active over passive, new global unconstrained equity managers were appointed.

A move into private debt and actively managed global credit, at the expense of Gilts that previously comprised two-thirds of the fixed income portfolio, was also agreed. Importantly, a push into real estate to seek reliable returns has seen the fund’s property portfolio increase nearly fourfold to £828m. This, he hopes, will achieve the right blend of inflation-proof returns and outperformance.

Concurrent with the new asset allocation, the fund implemented a synthetic hedging programme to decrease investment risk. “We are now about 60% hedged on rates and inflation,” he says, although this excludes the hedging quality of the long-dated, index-linked leases within the real estate portfolio. “Our true hedging is probably higher than that.”

Infrastructure is an area of interest due to its long-dated inflation-linked cashflows, and the fund recently invested in a joint venture with the BT Pension Scheme, which is managed by Hermes. He also cites infrastructure debt as having a better risk-reward profile than the equity equivalent, but concedes both are equally expensive. “We are tempted to keep our powder dry,” he says. “We are perhaps more interested in secondaries that are becoming available to us.”

The wholesale acquisition of a water company was also considered in early 2013, at the time priced at 2% of the asset portfolio, or around £150m. However, the sale ultimately completed at auction for around a fifth more than Santander was prepared to pay, nudging Barker more towards off-market deals.

“That exercise was useful in a number of ways: one in actually establishing the appetite for risk and what sort of risk, particularly in terms of reputation, the bank was comfortable with, but it also taught us that there are a lot of people bidding in auction situations with a much cheaper cost of capital than we were.”

The fund’s approach to real estate, Barker jokes, is “being very kind to desperate sellers”, but he says that he has no interest in buying actual distressed property, rather simply benefiting from a motivated seller, preferably in an off-market transaction. Real estate was “the obvious unloved bucket” to build on when he joined, at the time barely accounting for 3% of assets.

The current “big play”, is to focus on property assets that attract people’s disposable income, he says. “The truth of it is that we have less in office space than others, and certainly less in conventional office space.

“The offices that we’ve been buying have tended to be more, I suppose, converted warehouses, fairly trendy, with fluid floor plates, white washboards and bean bags. Nice places to be.”

Such a focus on disposable income sees the fund buying health, leisure and retail assets, and even recently assisting in the construction of hotel chains.

Liverpool One, a 40 acre (16ha) shopping centre redevelopment that houses retail and food outlets, a Hilton hotel, a multiplex cinema and a golf course, is just one example of fund’s partial holdings, which also include retail parks acquired in a £400m portfolio formerly owned by the Royal Mail Pension Plan.

“But we have also bought into some high street portfolios with almost boutique shops in nice market towns, which are fairly recession-proof, as well as a few high street properties, which again has embedded value in terms of things that can be done to the upper parts – a regeneration of the high street by getting residential back inside it.”

The acquisition of distribution sites also sees the fund hedging its bets in the battle between physical retail and the growing importance of online outlets. “Whichever way it goes, we’re expecting to capture the footfall,” Barker remarks, “even if it is only the footfall of the postman.”

Two more recent deals, the Manchester Arena and a historic brewery complex in East London that currently serves as a restaurant and wedding venue, illustrate the strategy of buying properties where, Barker says, the value may take up to a decade to emerge.

“Often, these assets were built with public money and it would be uneconomic to do it privately. But suitably re-priced, they make a very good opportunity for us, particularly where we can see there is scope to add on hotel space, additional corporate hospitality or nightclub facilities.”

The return profile is attractive, and based on internal assessments promises outperformance over retail-price-indexed (RPI) leases paid by supermarkets. According to Barker, even a zero-RPI environment would give the Manchester Arena, acquired in August last year, an internal rate of return above 4%, with a low RPI rate promising returns of around 7.5%. The fund cites the income from naming rights, restaurants, advertising billboards and the growth potential from future concerts – the venue is the third-largest seller, globally, of concert tickets – as a means of achieving its return.

Barker is proud of how fast the current governance model allowed the fund to act in acquiring the arena. The venue was surveyed within days of the initial approach and contracts exchanged within three weeks, despite the full sale price requiring a liquidation of part of the Gilt portfolio. “To convince the vendors we were serious about this, we agreed to an above normal deposit, which we put in escrow at their solicitor’s account rather than our own.”

The governance changes took effect in mid-2012, when the Santander fund, previously a collection of six legacy schemes from past acquisitions, consolidated into a single master trust structure with an overall trustee board representing all sections.

“From the individual trustees’ perspectives, yes they will still see themselves as having separate maturities and separate funding levels, differential requirements for funding and contribution strategies,” Barker admits, but he and the company now only have to face onto one trustee group when discussing these matters.

Barker notes that the previous arrangement was complicated, with four different administrators and actuarial firms working across all sections – “multiple auditors and a proliferation of advisers”. “There were no economies of scale, there was no common philosophy, there was no joined-up thinking,” he says.

The fund’s consolidation into a master trust structure builds on the pooling of assets into a collective investment fund, overseen by four company-appointed board members and three named by scheme beneficiaries.

Additionally, the fund avails itself of what Barker calls “fiduciary administration” by Santander Asset Management, which works with the central pensions team to design investment strategies and draw up any new manager recommendations, as well as implementing appointments once approved by the trustee.

Barker says he would be happy for the fund to remain focused on UK opportunities, as long as it can garner the necessary returns, and that investors should be careful of “diversification just for the sake of diversification”. He also says that, due to the relatively low annual return target, he is fortunate in that he can avoid leveraged investments.

Signalling perhaps further large single acquisitions in future, he concludes: “I’ve got a lot of sympathy for Warren Buffet’s view for putting all your eggs in one basket and watching them very, very carefully.”