The £9.5bn (€13.2bn) Santander UK Group Pension Scheme saw an investment return of 17.7% over 2014 as its commitment to real assets proved successful and the scheme lowered risk.
The pension fund, which provides retirement benefits to more than 60,000 former and current bank employees, saw its investment return outstrip the 13.3% seen in 2013.
It said investment performance was ahead of its benchmark and came as the fund increased hedging levels to nearly 60%, and decreased costs through simplifying administration.
Director of pensions at Santander UK, Antony Barker, said there was still a funding deficit in the scheme, which was not helped by falling interest rates – something the fund did not expect to change any time soon.
The scheme’s discount rate dropped 90 basis points to 3.6% over the year.
“Our fund is close to £10bn now, and we agreed to reduce our quoted equity exposure by a further 5% in favour of real assets, which we have been securing around the globe,” Barker said.
Its property fund increased by £296m and now stands at £1.1bn, including a range of properties across the UK and eight new commercial, housing and industrial properties.
Barker said the fund continued its approach to find the value in “hairy deals”, which require additional active management.
But he added that each new deal had a clear and detailed business plan and exit strategy.
The fund owns a concert venue in Manchester, which added a 24.6% return after the Santander scheme launched a raft of changes to the arena and helped increased revenue via advertising.
It also implemented a new approach to investing in hedge funds, shifting its entire allocation to hedge fund strategies into the equity of hedge fund managers.
“As pension funds worldwide questioned the value in the fees paid to hedge fund managers,” Barker said, “Santander has sought to benefit by reinvesting the proceeds from its own hedge fund exposure into the equity of hedge fund managers themselves – one of the first European pension funds to do so.”
Alongside the fund’s plan to shift equity exposure to real assets, it also boosted exposure to government index-linked debt, with total exposure now at £2.5bn from £2bn in 2013.
Last week, it acquired a 4% stake in Eurostar, the London to Paris and Brussels train operation, after the UK government sold its stake as part of its privatisation plan.
The stake was purchased by Hermes Infrastructure as the asset manager secured a 10% stake on behalf of Santander scheme and other UK pension funds.
The common investment fund, the amalgamation of six pension schemes brought together by Santander’s banking acquisitions, said last year it would reduce investment risk as the funding level improved.
On an accounting basis, the pension fund is now showing a £116m surplus at the end of 2014, a shift from the £554m deficit seen a year earlier.