Islington to build on residential property bet in alts push

The scheme’s funding level dropped to 70 per cent at March 31 2013 from 72 per cent at its previous valuation in 2010, and 78 per cent in 2007. 

However, due to an increase in gilts yields the funding level had risen to approximately 75 per cent by the end of August last year, according to its most recent valuation report.

More schemes are diversifying away from equities in a bid for less volatile returns that better match their liabilities, despite a stronger year for growth assets in 2013.

The fund's chair Richard Greening said Islington is considering decreasing its allocation to equities as the asset class has not “actually performed that brilliantly over the last 10 years”, despite picking up last year.

The scheme has allocated 30 per cent of its assets to UK equities and 32 per cent to overseas equities, according to its 2013 annual report.

“We continue to be interested in property because I think that provides good growth, while the rental income gives you more stability than equities and we’re considering other things,” said Greening. The scheme has a 13 per cent allocation to property which includes an investment in residential property. 

A recovery plan for the fund has been set at 22 years, according to its most recent valuation report. The scheme is also considering other alternative assets. “Infrastructure’s definitely interesting, particularly if it’s inflation proofed,” Greening said.

It is also considering investing in debt for small-to-medium sized companies, he added. The West Midlands Pension Fund announced earlier this month it would set aside £40m to finance companies in the Birmingham area.

Mark Nicoll, partner at consultancy LCP, said the reason some schemes have continued to diversify away from equities is because they are relatively volatile and are not a good match for liabilities.

"One of the things that we have particularly found an interest in recently is anything [that] gives you some sort of long-term return [that] has inflation linkage,” he said. Such assets include long-lease property, infrastructure and illiquid credit.

Tim Giles, partner at consultancy Aon Hewitt, agreed private debt and infrastructure are areas schemes are showing increasing interest in at present.

However, he said: “If you’re investing in these types of assets, that fund will drawdown [that] commitment for two to three years, [so] be prepared to do it at the right time,” he said.

Fall in gilts

Despite failing to dent its deficit, the scheme’s investment returns represented a £60m increase in its funding position, its 2013 valuation report revealed.

“The investment performance was above what was expected and the things like longevity have probably largely been offset by the movement to [consumer price index] rates,” said Greening. “But the movement from low gilts just swamps everything else.”

But this was outweighed by low gilt yields, which represented a £160m fall in the scheme’s funding position, according to the valuation report. There were other factors also affecting the shortfall.

Greening said calculating the funding level by reference to gilt yields “isn’t valid when yields are so low", adding: “I am not entirely in agreement with the approach that actuaries take towards that because they assume you’re going to buy gilts to pay pensions, but that just doesn’t make sense at the moment."

Barry McKay, partner at consultancy Hymans Robertson, said calculating schemes’ funding levels based solely on gilt yields may not be as useful.

“The problem is when are they going to go back up, and how quickly are they going to go back up, and what are they going to go back up to,” McKay said.

The scheme raised its belief in yield reversion with its actuaries. “It’s expected that gilt yields will at some point in the future revert to a normal level – however, that still leaves us with the short-term position over the next five to 10 years,” Greening said.

The difficulty when a scheme has opportunity for reversion is if gilt yields do rise then it is not able to take credit for the rise in its next valuation, said McKay.