Northern Powergrid scheme looks to reduce risk with new investment strategy

The scheme is in the process of completing its most recent triennial valuation, having reached a funding level of around 72 per cent.

Stephen Robson, group administrator and secretary for Northern Powergrid Group, said the scheme was hoping to improve its funding level, but was also focusing on “dramatically” reducing risk.

“The group is quite averse to risk,” he said. “Our scheme is very mature and open to future accrual but not new members. We’ve looked at diversifying from equities to infrastructure.”

The scheme has also considered liability-driven investment but has so far been put off by the cost.

The scheme’s investments have been performing well, he said. The trustee report shows an increase in net investment assets to £1.3bn at March 31 2013 from £1.15bn in 2012.

Despite this its property portfolio was performing poorly. “Our general mix of assets are performing well... property is a bit stagnant and has been for a few years, so that’s something we’ll look at,” Robson said.

The scheme holds a £106m stake in a UK unitised property fund, up from £102.3m in 2012. As part of the shift, the scheme recently appointed Aon Hewitt to provide investment advice.

“We’re just finalising our valuation at the moment,” he said. “We thought it was a good time to look at our investment adviser role.”

The popularity of LDI strategies has grown in recent years; a survey by KPMG found that the market had grown 11 per cent in the past year.

“The market has swung away from equities towards bonds and government bonds,” said Laith Khalaf, head of corporate research at Hargreaves Lansdown.

He added that schemes considering LDI should assess both their level of need and the costs attached to the strategy. “Keep in mind how beneficial it is and the cost of the consulting around the strategy,” he said.

Schemes looking to reduce risk often find the mass of investors looking to buy gilts can make LDI expensive, said Marc Pautz, partner at consultancy Mercer.

“There is a large imbalance between the supply of low-risk index-linked gilts and the demand from defined benefit schemes looking to hedge inflation risk,” he said.

This is partially due to the rise of discretionary pooled funds, Pautz said, as they offer smaller schemes the opportunity to carry out LDI where it may have been difficult in the past, which has driven up demand. “LDI is no longer the domain of larger schemes,” he said.

Rob Davies, partner at consultancy Quantum Advisory, argued in this week’s Technical Comment (page 18) that trustees should target enough return to satisfy a recovery plan when reviewing an investment strategy.

“There are numerous practical issues to consider when setting up a liability-driven investment governance programme,” Davies said. “The first is how to measure the funding level. This information is time sensitive, and a ‘quick and dirty’ figure can trounce one that is precise but outdated.”