UK - The UK's Pension Protection Fund has outlined its investment principles, highlighting a diversified, liability-driven approach with derivatives.

The PPF's updated Statement of Investment Principles said the asset portfolio would be diversified to enhance returns, with a liability-driven approach targeting a 1.4% p.a. out-performance over the benchmark.

It said the strategy "balances security for scheme members and the interests of levy payers" and "limits exposure to the risk of underperforming at the same time as UK DB pension schemes".

Assets will include government bonds, non-government bonds, index-linked bonds and cash or derivative instruments relating to such assets.

In addition, the strategy seeks to enhance the returns through investment in UK and global equities hedged back into sterling, global government bonds hedged back into sterling, property and currency overlay.

The PPF added: "The board will use derivatives to adjust assets to: better match the Fund's liability profile, reduce the impact of unrewarded risks such as interest rate and inflation risk; and provide some protection against fall in equities."

The statement was welcomed by consultants. "The PPF's updated SIP makes welcome reading for trustees and corporate sponsors as echoes and signposts what we have being telling our clients for some time - the key features of any investment policy should focus on the liabilities, consider removing/reducing unrewarded risks, diversify returns and be more dynamic," said Lane Clark & Peacock partner Ken Willis.

"The PPF's use of derivatives will also help trustees and sponsors understand that such approaches are now mainstream and will help further the discussion for more modern risk management techniques within pension scheme's investment policies."

Earlier the Pension Regulator warned trustees to beware of corporate transactions where the primary intent is for the employer to abandon the pension scheme.  

"We have also been informally approached by advisers to pension schemes proposing mechanisms that seek to remove the employer covenant," the regulator said.

"While we generally welcome innovation that helps employers and trustees manage risks better, we do not consider that abandonment of a scheme by its employers is usually likely to be in the best interests of scheme members unless the full section 75 debt is paid.

"Trustees should be able to secure innovation and improvement in the areas of administration and investment without breaking the link with the employer.  Therefore, promises of access to such better services are not seen as relevant factors for trustees to consider in making decisions on transactions that break the link with the employer."

It added: "We expect trustees to recognise this and act accordingly."

In other news, the £414m (€612m) City of London Pension Fund has decided to join a US pension fund in suing the board of directors of BP for negligence in their North American operations.

The lawsuit filed by Bill Lerach of the Californian firm Lerach Coughlin Stoia Geller Rudman & Robbins particularly mentions leakages because of corroded pipelines in Prudhoe Bay oil field in Alaska.

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