The Church of England Funded Pension Scheme has seen an improvement in its funding level thanks to asset outperformance, in particular from equities, as it looks to increase its illiquid asset holdings.
Schemes that have retained a strong bias towards equities have seen funding levels rebound as asset performance overtakes the growth of their liabilities, though many are now decreasing their allocations to equities to reduce volatility.
The Church's current asset mix
The CofE Pensions Board administers five pension schemes, including the funded scheme.
Assets are pooled to allow the smaller schemes to access economies of scale. The funds are unitised, with each scheme's share reviewed on a monthly basis.
Return-seeking pool (£1.4bn)
UK equities: 20%
Global equities: 65%
Property: 8%
Global tactical asset allocation: 5%
Infrastructure: 1%
Cash: 1%
Liability-matching pool (£210.4m)
Index-linked government bonds: 77%
Corporate bonds: 23%
Source: CoEPB 2013 annual report
The funding level for the Church of England Funded Pension Scheme increased to 89.3 per cent in 2013 from 75.4 per cent at the end of the previous year.
The five schemes’ return-seeking pool (see box) generated 18.6 per cent over the year, beating the benchmark of 17.6 per cent. Non-UK equities returned 23 per cent over the one-year period, beating the benchmark of 20.7 per cent.
UK equities, however, fell just short of the 20.9 per cent benchmark with 20.7 per cent for the year. Emerging market equities lost 6.1 per cent.
The CofE scheme has an ongoing derisking plan to capture improvements in the funding level and also plans to increase its allocation to property and infrastructure.
A spokesperson said: “The pensions board continues to monitor both investment strategy and asset allocation and [the Church of England Funded Pension Scheme] already has a phased plan of derisking over the next 16 years.”
Simeon Willis, principal consultant at KPMG, said a lot of schemes had a good year in terms of investment performance, but a rise in nominal gilt yields was likely a meaningful factor. “Liabilities falling is likely to have been the biggest factor due to nominal gilt yields rising," he said.
He added such rises were more likely to be seen in schemes that had not hedged against falling gilt yields. “If you can have a situation where the funding level improves so dramatically, you could conversely have had the opposite effect,” he said.
Ethical investment
The pension board’s annual report noted the minor difference in performance caused by the fund’s ethical policies: “The return on the MSCI World Index was 21.8 per cent over 2013, but that basket of stocks excluding the companies restricted because of the board’s ethical policies returned 21.7 per cent for the same period.”
Tim Currell, head of sustainable investment and corporate governance at consultancy Aon Hewitt, said over the long term ethical investment strategies do not necessarily have a negative impact on the performance of the fund, and could be pursued provided the scheme membership was likely to share the scheme’s view.
“Year by year clearly there will be variations,” he said. “I don’t think exclusions are a bad thing as long as you can be sure the membership [agrees].”
The report also stated global small-cap equities returned 37.7 per cent over the year, which may make other assets look lacklustre in comparison.
“Over the year our property has returned 9.8 per cent, infrastructure 10.2 per cent and GTAA [global tactical asset allocation] 5.1 per cent, which are still good figures, particularly as these asset classes are less volatile than equities,” it stated.
The fund is also looking to increase its allocation to property to 10 per cent of the return-seeking asset pool, from 8 per cent. Infrastructure is to increase to 8 per cent from 1 per cent. It has already rebalanced its property portfolio for an even split between UK and overseas property.
