The Pensions Trust eyes alternative hedging assets

Defined benefit schemes looking to derisk their investment portfolios have faced a dilemma over whether to buy matching assets at yields that are perceived to be historically low.

Defined benefit schemes looking to derisk their investment portfolios have faced a dilemma over whether to buy matching assets at yields that are perceived to be historically low.

The £5.5bn fund, which has 36 underlying DB schemes, has decided to target index-linked corporate bonds, long-lease property and ground rents as mid-way assets between gilts and return investments.

“What we wanted to do was to bring them all together into one fund and outsource it to a fiduciary manager to look after on our behalf,” David Adkins, chief investment officer at the fund, told delegates at the NAPF conference.

The scheme decided to outsource this investment mainly on capacity issues, due to its relatively small investment team, but will want to keep a close eye on the manager, he added.

“If we do see a good idea we want to be able to go to the fiduciary manager and say, ‘we’ve seen this, what do you think, is it worthy of inclusion?’”

The CIO predicted challenges in finding assets such as ground rents due to the low number of such investments on offer and the weight of institutional money heading for them.

David Druley, a managing director at Cambridge Associates, also speaking on the panel, said schemes were being left with limited options by the current low-return investment environment.

These are to lower their return targets and accept they need to pay more contributions, to “risk up” in their asset allocation, or reconfigure their liability-matching portfolio in an attempt to get value for members. “No one strategy is appropriate for every plan,” Druley said.

Delegates heard how The Pensions Trust had become trapped by the decline in gilt yields as it waited to derisk. Some of those underlying schemes had “no inflation hedging in place at all,” said Adkins.