BA opts for real assets to match liabilities

The £8bn NAPS has launched a portfolio of real assets, designed to provide a stable long-term income stream that will meet the scheme’s liabilities.

The £10bn Strathclyde Pension Fund recently announced it would, in principle, commit £100m to infrastructure investment.

British Steel and Boots pension schemes have both made large allocations to real assets in recent years, to manage their exposure to inflation.

BA did not reveal details about the size of its planned allocation.

In a note to members, the scheme said: “The investment strategy… is designed to capture opportunities as they arise and to manage the risks to which the scheme is exposed in the years ahead.

“There will be a… specific allocation to infrastructure projects and other long-term investment.”

Schemes which invest in assets that closely track their liabilities are able to manage long-term risks better.

Tangible assets

Real assets such as infrastructure and real estate are often used as a substitute for inflation-linked government bonds.

If you want to have an asset that matches your liabilities, you really want something that is contractual

William Nicoll, M&G

“This may or may not be better than any other strategy, but it is often perceived as being lower risk than producing capital growth,” said Richard Butcher, managing director at Pitmans Trustees.

Real assets also have a low correlation to traditional pension scheme investments such as stock and bonds.

Income from property investment can also be predictable and stable – giving an annual return of around 6 per cent – according to Graeme Rutter, co-head of property multi-manager investment at Schroders.

Other very large corporate pension schemes, such as British Steel and Boots, have already made such investments.

Since 2007, British Steel has put £400m into property and infrastructure, whereas Boots has allocated £135m to the UK property market through investing in value-added and opportunistic property funds.

NAPS has also extended its hedging programme to protect itself from the risk of sharp drops in share values.

This uses a so-called 'collar trading' strategy that is constructed by holding shares of underlying assets, while simultaneously buying put options and selling the same amount of call options.

Schemes not ready to take risk

But there are a number of risks in relation to income generation from real assets. The complexity of the construction phase can be unattractive for the schemes.

“It is all costs and no returns,” said Roger Mattingly, president of the Society of Pension Consultants.

It can take a number of years before an asset is able to generate an income and there can be substantial costs in the early years.

William Nicoll, director of fixed income at M&G Investments, said there were certain protections schemes could put in place to manage construction risk.

“If you want to have an asset that matches your liabilities, you really want something that is contractual,” he said.