Judge’s comment: “This fund focuses on decision-making and action and is not afraid to make bold decisions –strong characteristics that are to be applauded”
The British Steel Pension Fund (BSPF) continued to demonstrate its leadership in liability-driven investment in the year to end-March 2015 by further reducing the inflation mismatch between its assets and liabilities by buying into index-linked government and corporate bonds at very attractive levels compared to market values.
It also targeted opportunistic purchases of index-linked securities at less demanding inflation breakeven rates than those prevailing in the inflation swap market. The fund implemented an inflation swap overlay worth over £600m (€835m) on its corporate bond holdings. The absolute size and duration of BSPF’s index-linked portfolio have both increased very significantly in the review period.
On the equities front, BSPF periodically continues to seek buying opportunities in market troughs while regularly selling in sustained market rallies in a very disciplined manner. Buying and selling stocks means the fund continually monitors the value added through both derisking and rerisking exercises compared to its strategic benchmark weightings. To date, derisking has added £889m, while re-risking has added £834m. The total value added thus far is therefore £1.72bn, which equates to around 13% of the British Steel scheme’s overall value.
Looking at other asset classes, the fund has further increased its level of diversification by investing in high return bonds, including distressed sub-prime mortgage securities, high yield and emerging market debt. It also continues to hold meaningful allocations to infrastructure, private equity, currencies, commodities, timber and catastrophe reinsurance funds. One area less successful area is in alternatives and following a very mixed experience with different alternative investment classes, BSPF has strategically reduced its allocation to them.
Real estate was another class targeted in the period under review, with a sizeable increase in the allocation to commercial property during a period of severe price dislocation. Furthermore, the terms of the majority of these purchases were very attractive from the perspective of liability matching, as over £571m of these new investments comprise long-dated, index-linked leases with strong and secure covenants.
In terms of real yield they compare very favourably with index-linked securities and thereby represent a good liability match with fixed uplifts typically applied to annual rental increases, which mirrors the limited price indexation of benefit accruals of active members. These properties are managed by the fund’s in-house property team at no marginal cost, providing clear cost benefits when compared to externally managed alternatives of a similar nature.
BSPF has been holding higher than normal levels of liquidity recently. This, together with the very detailed cash flow forecasting it undertakes internally, means it able to discharge its benefit obligations as they fall due for a very long time without having to sell off any investments. It is also well positioned to take advantage of opportunistic investments in the event of a potential market sell-off arising from earlier than expected tightening of monetary policy in the UK. Investing this liquidity securely has been a major concern for the fund, particularly in light of current negative real returns. To protect itself, it has therefore made extensive use of reverse repurchase arrangements under the terms of which its short term cash deposits are fully collateralised with Gilts.
Finally, the average cost over time of managing the investments of the fund as a percentage of total investments is approximately 6 basis points or around £63 per member each year, which BSPF emphasises is very much towards the lower end for the UK occupational pensions.
Essentials to March 31 2015
British Steel Pension Fund
Founded in 1969
Defined benefit corporate pension fund
- active: 16,075
- retirees: 86,071
- deferred: 32,559
- one year: 14.6%
- three years: 9.4%
- five years: 9.1%
- ten years: 9.0%
- Inflation swap overlay of over £600m on corporate bond holdings
- Significant increase in commercial property to further match liabilities
- Low investment cost of six basis points per member in review period
- Kingfisher Pension Scheme
- Merchant Navy Officers’ Pension Fund
- Santander UK Group Pension Scheme Common Fund
- Trafalgar House Pension Trust
- Adrian Cooper
- Robert Gardner
- Neill Hamilton
- Bob Swarup