Unilever refines DB and DC investment after review

In March 2015, they approved a revised derisking framework for the company's £7.6bn DB scheme, bringing forward the derisking targets. 

The strategic asset allocation was revised to allow for a lower-risk investment strategy through a reduction of holdings in growth assets, an increase in income assets and a restructuring of the scheme’s liability-driven investment mandate.

A synthetic equity portfolio previously in place has been replaced with a physical passive index fund in order to simplify the LDI portfolio. 

If the sponsor can’t afford to pay, trustees have to take enough risk to have a decent chance of paying benefits in full

Jon Hatchett, Hymans Robertson

The revised derisking framework will allow for “a more diversified portfolio at the 110 per cent funding level, while bringing the first derisking trigger forward from 95 per cent funding to 94 per cent funding”, the scheme’s most recent annual report states.

Funding triggers beyond 94 per cent were also refined to allow gradual implementation with minimal market risk; all revisions to the strategy were implemented from May 1 2015.

How much risk?

Jon Hatchett, partner and head of corporate consulting at Hymans Robertson, said deciding when to derisk is never an easy decision for trustees and there is no “magic answer” on the right way to go about it; decisions and strategies must be built on a scheme-specific basis.

He said that trustees must ask, 'How much risk can I afford to take?'. 

For many schemes, the best option will be to reduce risk in assets and take a 'slow and steady' route to full funding, while others will be faced with a much more challenging scenario, he said.

“If the sponsor can’t afford to pay, [trustees] have to take enough risk to have a decent chance of paying benefits in full,” Hatchett said. 

At the other end of the spectrum, schemes with very strong sponsors like Unilever should think about value alongside considerations of risk and aim to drive efficiency in their portfolio, he said. 

“There are capital-efficient ways to get access to growth returns and liability matching,” Hatchett said, naming synthetic equity structures and pooled credit default swaps as two such vehicles. 

Giles Payne, director at professional trustee company HR Trustees, said funding triggers set some time ago are unlikely to be met in the current market environment.

“You don’t necessarily want to leave all that risk running – at some point you might need to say whatever the market levels are we can’t run this level of risk,” he said. 

“Many funding-based triggers have been structured to allow a degree of mean-reversion on gilt yields, but with no sign of these being met many schemes have opted to move into a time-based structure.”

DC funds review

Unilever established a DC section during 2007 and 2008, now worth £71.6m, in addition to its final salary and career average revalued earnings DB arrangements.

Trustees reviewed the range of funds, fund charges and automatic switching options available to members during the year, which were implemented and communicated in Q4 2015.

The previous range of seven funds included a 'moderate growth' fund as the default option, accounting for 84 per cent of total assets and 82 per cent of the section’s 7,500 members; an 'income/bond' fund; and an 'aggressive growth' fund.

The returns of all funds, net of fees, failed to meet allocated benchmarks during the reporting period.

The annual report states: “The fund return is net of investment management fees while the benchmark return does not allow for these costs.”

Andrew Cheseldine, partner at consultancy LCP, said many passive funds underperform index benchmarks as transaction charges eat into costs.

“To match the FTSE All-Share Index you’d have to trade without costs,” he said.   

Cheseldine said trustees must ensure benchmarks are entirely appropriate for each fund, with thought given to how currency hedges and the timing of pricing of funds might impact performance relative to specific benchmarks.