The UK defined benefit schemes of mining multinational Anglo American have halved their already minimal exposure to equities, as the plans near self-sufficiency and reduced risk.
Anglo American’s latest annual report, released last month, shows the UK schemes’ total allocation to equities dropped to just $57m (£43m) over 2018, down from $119m a year earlier.
A spokesperson confirms that shares now represent less than 1 per cent of their total $4bn assets after further selling.
As funding levels improve it is not surprising we continue to see well-funded schemes taking risk off the table
Rob Price, Axa Investment Managers
“Anglo American’s approach to UK defined benefit pensions is to seek to reduce risk and volatility through investment in liability-driven investment strategies, while maintaining some potential upside through investment in largely bespoke corporate bond mandates,” thee spokesperson explains. The derisking process began in 2013, with proceeds invested in matching LDI assets.
Surplus allows less risk
The scheme’s growth needs are met with some of its allocations to corporate bonds, which total $2.1bn. Trustees have set a gradual path of derisking in place, which can then flex to take advantage when opportunities arise, according to the spokesperson.
“Disinvestments from equities have been made since 2013 with actuarial and investment advice and have been linked to the respective funding/investment plans in place on particular schemes, with the aim of crystallising funding gains at opportune times and reducing risk,” they say.
The luxury of this low-risk strategy is afforded to the schemes by their healthy funding levels. Worldwide, Anglo American’s accounts say its schemes are 118 per cent funded, up from 111 per cent at the end of 2017.
Schemes can ease into derisking
If the Anglo America schemes’ maturity make them an obvious choice for low-risk, cash flow-driven investment strategies, there is some debate about how suitable the latest ‘flavour of the month’ is for the wider UK DB market.
Rob Price, fixed income portfolio manager at AXA Investment Managers, says CDI is not an “all-or-nothing” strategy, but one that can be adopted in stages as funding improves.
“Even for less funded schemes that may be further away from their endgame, how pensions are paid along with how deficits will be closed should be considered as a vital part of their objectives and investment strategy,” he says.
He adds: “As funding levels improve it is not surprising we continue to see well-funded schemes taking risk off the table, which at this stage of their journey will typically focus around reducing growth assets in exchange for assets that deliver more certainty around cash flow delivery – such as corporate bonds or gilts.”
“However, we expect that growth assets will continue to play a role within a scheme’s investment portfolio,” Mr Price says. “Underfunded schemes with high investment targets will need to keep risk on the table in order to close deficits over time, and even well-funded schemes may look to maintain smaller allocations to growth assets to account for the risks that cannot be removed, and cash flows that cannot be matched.”
