IBM Pension Plan has invested £60m in catastrophe bonds as it decreases its exposure to higher-risk assets and focuses on investments that will provide a diversified source of return.
Catastrophe bonds are centred on natural disasters and are highly concentrated on US wind risks, such as hurricanes.
The scheme’s most recent annual report, released in July, announced a move into reinsurance made at the end of last year.
IBM's asset mix
Emerging market equities: 2.96%Global equities: 32.67%UK government bonds: 35.44% Overseas bonds: 20.62% Property: 3.91% Private equity: 2.53% Reinsurance: 1.04% Swaps: 0.83%
Source: 2013 annual report
The £5.9bn scheme invested 1 per cent of its assets in the fund. Robert Howie, the European head of Mercer’s alternative research boutique, said there has been “reasonable” interest in insurance-linked securities from pension schemes, and it is an idea they have taken to their clients.
“It is a source of return that is uncorrelated to some of the other return drivers,” he said. “[But] it has its own unique risk profile so it isn’t for all clients.”
To address this, Howie recommended schemes look at diversified portfolios, which can include both earthquakes and man-made disasters.
Tim Giles, partner at consultancy Aon Hewitt, said although the asset class is attractive, trustees should be wary of timing in the economic cycle and insurance cycle. In the wake of disasters, such as Hurricane Katrina, insurance premiums go up rapidly, he said.
“The benefit of then funding is far greater, effectively you are getting paid more for putting your money into it,” Giles said. “If then over time the market softens and you get slightly less premium from it, the return you will get on the money will be less.”
There have been fewer natural catastrophes recently and so premiums are performing well, he added, but more money has been pumped into the asset class which could dampen returns.
Addressing the deficit
The IBM scheme also extended its recovery plan with its sponsor after an £89m increase in its funding deficit.
Its annual report showed a deficit of £766m at the end of 2012, an increase of £89m since 2009.
The plan attributed the worsening position to a reduction in long-term bond yields. The company will continue to make deficit contributions of £63m a year to June 30 2022, instead of December 2020 as previously agreed.
IBM did not wish to comment further on the changes.
