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Jonathan Williams reviews the Strathclyde Pension Fund, a defined benefit scheme which is still open to new members as well as net cashflow positive.

With £11.4bn (€13.6bn) in assets, Strathclyde Pension Fund is the largest pension fund in Scotland, as well as one of the largest in the UK local government pension scheme (LGPS). It also counts as one the UK's largest defined benefit funds and is still to be open to both accrual and new members.

Richard McIndoe, head of pensions, nonetheless has to contend with the same problems facing many of the funded private and public sector schemes, most notably the issue of cashflow following far-reaching redundancies among his members since many have opted for early retirement.

"They go from paying into our scheme to drawing a pension, and a bit earlier than expected," he says. "That's been a very quick change in the membership profile and the cashflow dynamic."

Strathclyde, responsible for employees of Glasgow City, Ayrshire, Bute and other Scottish local authorities within the area of the former Strathclyde Regional Council, is still net cashflow positive, albeit at a significantly reduced ratio compared to the 2010-11 financial year. According to preliminary accounts up to March, net income from contributions fell by nearly two-thirds to just £43m.

While some of this may be offset by the introduction of auto-enrolment, with the scheme's employers readying for their staging dates early next year, this would largely affect lower-paid employees to previously opt out. "We would anticipate that a lot of them would opt out once more - but not all of them," he says hopefully. "It's not all one-directional."

McIndoe is aware that a change in investment strategy may be required over the medium-term, with better management of equity dividend income an important part of this given the fund's 73% strategic and 75.5% actual allocation to equities, as well as their low exposure to fixed income - at 11.5%, well below the 15% target. "We haven't, to date, really targeted the yield or dividend flow or managed it to any technical extent," he admits. "We tend to take what natural divided flow comes from our portfolio and, as things stand, re-invest it. But clearly, as we go forward, we won't be able to invest all of it, we will have to use some of it to pay pensions."

Another target is infrastructure, and McIndoe says the potentially reliable income stream of the asset class is one of the reasons the fund is interested in the proposed Pension Infrastructure Platform under development by the UK's Pension Protection Fund and National Association of Pension Funds (NAPF).

Strathclyde has so far only agreed to provide launch capital to the project, with McIndoe saying that discussions at committee level amount to a "clear statement of intent to invest in it", with a decision on the amount of seed capital - expected to be £100m - not yet formalised.

He adds that there is a "fair chance" further infrastructure investments would follow, as it provides the income any scheme facing the decline in active members would want - but McIndoe repeatedly stresses that this only applies "in principle". He adds: "In practice, there are the difficulties of getting the right investments at the right price and the right structure - all those things [chief executive] Joanne Segars at the NAPF has talked about."

However, the financial crisis has thrown up other opportunities outside of infrastructure investment that Strathclyde has already been happy to seize on - with loan facilities offered to businesses through a number of ventures including the Holyrood-government-backed Scottish Loan Fund, managed by Maven Capital Partners, formerly Aberdeen Asset Management's private equity business.

McIndoe is keen not to overstate the fund's level of local activity - of the £65m committed, only between £10m - £15m has been allocated to date - and he says it is a gradual process.

He adds that the local target allows the fund to exert a greater amount of control over private equity compared to the more "far-flung" investments inherent in a global approach. Despite Strathclyde's £927m private equity programme - overseen by Pantheon and Partners Group - that has been in place for two decades, McIndoe seems more comfortable with the scheme's newer, local investments.

"Private equity holdings are very long-term and expensive investments that give you very little control over things. In this part of the fund, we wanted to be close to investments, so it's more direct than the other work we do. That does give us involvement and control."

He cites another opportunity, a cash flow financing deal that will see Strathclyde provide a bridging loan to City Legacy to finance construction of the athletes' village needed for the 2014 Commonwealth Games in Glasgow. The loan, paid back over a year-long window, involves "quite a complex" collateral arrangement, McIndoe admits, but will not see the scheme take ownership of the portfolio.

He adds that to be considered, the investment would have to offer a 5% return above the scheme's own benchmark, but says that its approach also offers Strathclyde the benefit of reducing the number of intermediaries in the investment chain, for instance within private equity.

One change expected in the future will be a reduction of the equity investment - accounting for 75.5% of assets at the end of March, ahead of its benchmark by 2.5 percentage points. McIndoe says the re-adjustment would come as part of a de-risking of the scheme. "Once we're 110% funded, which is a long way from where we are just now, we will take 10% of equity off the table."

According to its most recent actuarial valuation, the fund was 97.3% funded, although McIndoe notes that the March 2011 figure is no longer accurate and has declined. Nonetheless, he sees the 110% target as realistic.

"It's a policy and it sets a marker for us that at some point in the future. We will reduce the equity exposure but we think we have time to do that and we want to do it when the time is right," he insists.
 

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