Perception is key

Judge’s comment: “A well-rounded submission that ticks a lot of boxes, with lots of innovation and detail. Santander focuses on developing a reputation for attracting good investment.”

The £9.7bn (€13.2bn) Santander UK Group Pension Scheme Common Fund holds the investments of one of the UK’s largest pension arrangements, providing benefits to over 60,000 current and former employees. Both 2014’s 17.7% and 2013’s 13.3% returns represented an outperformance of both the benchmark and the liabilities, while hedging levels have increased to 50-60% and costs have been reduced dramatically. This success is largely attributable to real assets and alternatives. 

Philosophically, the fund sees only two types of risk - unrewarded and rewarded. It divides opportunities into economic risk and duration risk, including longevity and inflation, which are unrewarded and so hedged out at the best price possible. It then seeks to identify the underlying investment thesis before establishing the best rewarded asset class to gain exposure.

A real assets portfolio was kick-started by the acquisition of a £400m commercial property portfolio from the UK government’s sale of the former Royal Mail Pension Plan assets, followed by the development of a liability-hedging portfolio of property with explicitly inflation-linked rent increases. Following a further review of investment strategy, the allocation to real assets and other illiquid classes increased to 30% in 2014, while the scheme also increased its commitment to private debt and other non-core credit strategies.

Many acquisitions are off-market, a sector where the fund believes people look for certainty in their deals. According to Santander, pension funds have a reputation of pulling out of deals last minute but with cash in the bank, being able to execute deals quickly and having a reputation for seeing deals through, the fund claims it is in a virtuous position whereby others bring their best ideas for it to consider.

Since the fund has a longer time horizon and a liquidity collateral plan in place, it can take on more complex projects. This is not, however, just buying higher yielding and higher-risk investments; each asset must have a clear and detailed business plan and exit strategy before Santander will commit to it. 

Although pension funds are largely tax exempt, tax has a lot to do with ultimate returns so the fund structures all its investments to minimise tax, regulatory and reputation risk, while seeking to optimise the level of its future liquidity. Moreover, the fund applies strict risk controls through sensitivity analysis. If it cannot get its money back in an absolute doomsday scenario it does not invest.

The fund is a strong advocate of collaboration and shared services, linking up with other pension schemes in the UK and overseas in a variety of joint ventures designed to enhance governance and execution practices, while enabling mutual participation in the best ideas. One example is the joint venture the scheme is currently working on with Denmark’s PKA to bring grazing technology as part of agricultural holistic management to 2m acres of New South Wales farmland, demonstrating Santander’s use of impact investing in illiquid markets to make an environmental difference.

Although the fund’s large and diverse asset base could justify an extensive in-house management capability, the shared services and team ethos have led instead to the creation of various expert partnerships, best illustrated by the stake taken in Hermes’ infrastructure vehicle. The Hermes fund was seeded by investments from the BT Pension Scheme and has allowed Santander to become more fully invested more quickly and thus to move further up the J-curve profile that is typical of illiquid assets, in return for a commensurate reduction in fees and higher level of engagement. Since the partnership was created, the Hermes fund has developed a number of renewable energy investments as well as acquiring port sites. Most recently, Santander’s segregated account programme was the major but silent supporter of Hermes’s successful bids for Eurostar and AB Ports. 

Santander UK Group Pension Scheme Common Fund

United Kingdom

Defined benefit corporate pension fund


  • all members: 60,000

Assets: €13.2bn


  • one year: 17.7%

Quick facts

  • Thorough analysis to confirm full potential of target investments
  • Recent success attributable to real assets and alternatives
  • Culture based on partnership and collaboration


  • British Steel Pension Fund United Kingdom
  • Deutsche Telekom Pensionswerke Germany
  • Pension Fund SBB Switzerland


  • Felix Goltz
  • James Kavanagh
  • Graziano Lusenti
  • Neil McPherson