Schemes have taken advantage of alternatives to protect themselves from stock market volatility, with The Pensions Trust and GEC funds already benefiting from this approach
The GEC 1972 Plan and The Pensions Trust have both managed to protect themselves from ongoing stock market losses by investing in alternative assets.
Diversifying has allowed these schemes to remain in growth assets but avoid the worst of weekly losses of as much as £34bn which have hit UK funds invested in equities.
Many pension funds which have followed similar approaches have reduced the risk to their members' assets from the loss of confidence in global stock markets.
Scheme experiences
Speaking at the UK Leadership of Pensions summit on Thursday, Stephen Nichols, chief executive of The Pensions Trust, said the multi-employer scheme had been moving away from relying on equities over the past four or five years, and had benefited over recent months as a result.
He said: “We have been looking to diversify them and move more towards alternatives. We have more alternatives now than we do equities.”
The scheme had opted not to “lock in” to the current historic low bond yields due to the premium it would have to pay to take some risk off the table, he added.
Earlier this year, the scheme announced it was planning to double its overall liability-driven investment (LDI) assets, and to provide daily funding updates to each of its 38 member schemes.
Pat Moloney, member-nominated director of the Stanhope Pensions Trust, which manages the GEC plan, said his fund had also sought to protect itself from equity slides by also looking further afield.
“We have avoided equities, and we have mainly gone towards return-seeking assets of diverse types,” he said. “Although [the current market] has been difficult, it has not been as difficult as it might have been.”
Moloney also said schemes have to think more cleverly about the risk in their portfolios, as “most people believe we are not going to return to the pre-2008 situation”.
Video: In this schemeXpert Review, the panel discusses the future for equities.
According to the 2010-2011 report of the Investment Management Association, 38% of third-party institutional client assets were invested in equities during that year, and “other” mandates – referring to LDI and alternatives – were much smaller a proportion at 8%.
But despite the returns on offer, the July report quoted an industry view saying it was “incredibly difficult to put in place a governance framework” to invest in alternatives, but some of the larger schemes had increased their knowledge to take advantage of a wider range of strategies.
Alternative investments, such as hedge funds and private equity investments, are as a result the preserve of the larger pension funds, though there have been some pooled funds brought to market in recent years.
Understanding the alternatives
Nichols emphasised to schemes the importance of remembering the purpose of their investments – the benefit of members – and educating themselves about the less mainstream options.
He added: “If you rely on your consultants and fund managers, you might find you have missed an opportunity.”
Also on the panel, Bestrustees chairman Alan Pickering, who is also chairman of the Plumbing Industry Pension Scheme, said the key challenge posed by the current equity losses was the corresponding threat to the employer covenant.
“Top of trustees’ list should always be the relationship with the employer”, he said. “What is the current economic state doing to the employer and does that have any impact?”
While these schemes saw a need to take risk out of their investments through diversification, they were not quick to join the longevity swap bandwagon in their desire to reduce the risk of their schemes.
“One of my concerns is that funds get value for money from it,” said Moloney. “Is that really giving good value for money for the membership?”
