Aberdeen transport fund swaps derisking provider in self-sufficiency push

Derisking and diversification have been ongoing themes in pension scheme investment for more than 50 years.

I get the feeling that trustees and companies have got to the position where they’ve been putting interest rate hedging off and off and off

Simon Cohen, Spence & Partners

Fund manager UBS’s Pension Fund Indicators 2015 report showed allocations to UK equities and UK fixed income have been declining since 1962, with other assets such as index-linked gilts, overseas fixed income and alternatives gaining greater prominence.

The ACTF, which is administered by Aberdeen City Council alongside the North East Scotland Pension Fund, awarded the derisking brief to Schroder Investment Management, as a contract with a different provider was concluded before the end of its term “due to unexpected circumstances”, according to the award notice. The previous manager appointment had been announced less than a year ago.

“There are significant financial and funding risks associated with the pension fund’s current position, which demands an immediate solution and new fund manager,” the award notice added.

The award document stated that the solution should enable the ACTF to access the same kind of diversification and specialisation as the North East Scotland Pension Fund, without needing extra resources.

It continued: “Partnership working is required with both Aberdeen City Council Pension Fund Staff and the scheme actuary to agree the nature of the derisking solution to be adopted and the ongoing application of the solution.”

The last actuarial valuation of the fund in March 2014 showed a funding level of 93 per cent.

A spokesperson for the fund said the derisking provider would work alongside the fund through a segregated mandate.

“The derisking strategy is to be implemented to deliver a fully funded ongoing position within an agreed timescale yet to be finalised,” the spokesperson said.

Source: UBS

The spokesperson added that the fund was not considering a buy-in or buyout, while the award document stated the solution should make the fund self-sufficient to be able to meet liabilities “for example via a buyout or buy-in”.

LDI favoured for derisking

Gavin Orpin, partner at consultancy LCP, said schemes looking to derisk were increasingly turning to liability-driven investment.

“LDI has become a huge market sector,” he said. “The majority of our clients are using LDI in some shape or form, and those who are using it have generally increased their hedging over the past few years.”

Research supports this; consultancy KPMG’s 2015 LDI survey showed the number of LDI mandates increased by over 200 in 2014, bringing the total amount of scheme liability hedged to £657bn.

Orpin added that prevailing attitudes around hedging had changed, too; where a few years ago schemes were more focused on timing their hedging to maximise value, now they are more likely to want to ensure they have the protection in place instead of eking out gains through market timing.

Simon Cohen, head of investment consultancy services at consultancy Spence & Partners, said many schemes using LDI were focusing on interest rate hedging in particular.

“I get the feeling that trustees and companies have got to the position where they’ve been putting it off and off and off,” he said.

Cohen and Orpin both said they had seen an increase in the use of bespoke pooled investment structures, which sit halfway between the pooled structures favoured by smaller schemes and the segregated mandates often used by large schemes.

“[It’s] bespoke in terms of the types of assets, but you are still in a pooled arrangement,” said Cohen.