Consumer goods giant Unilever's pension fund has adopted an outcome-led investment approach split into five key objectives, jettisoning its previous focus on asset allocation in a bid to avoid short-termism.
Pension schemes frequently characterise investments through a growth or matching allocation, but Unilever has switched to five set categories: liability-driven investment and collateral, growth, income, inflation, and other diversifying assets.
Tony Ashford, chair of the £6.9bn Unilever UK Pension Fund, explained in the introduction to the scheme’s 2014 annual report: “Previously our starting point was purely in terms of allocations to different asset classes, whereas going forward our starting point is to consider different weightings to different groups of asset types based on their purpose.”
The scheme said the move led to greater clarity and focus on investment objectives, as well as “an improved investment governance framework and a shift towards investing with less risk of short-term decision-making detracting value.”
Le Roy Van Zyl, principal in consultancy Mercer’s financial strategy group, said: “If you think about where we’ve come from you had a big growth bucket and a matching bucket – looking at the next level down probably makes a lot of sense.”
However, he added a number of assets can fill a number of roles, raising questions about how neatly they can be categorised. “Corporate bonds give you return but some interest-rate protection as well. Gilts [provide] inflation return and LDI collateral.”
Simeon Willis, principal consultant at KPMG, said: “Traditional pension schemes have targeted a return, so it invests in assets that target that return with the most diversification. We take a more comprehensive view of what you’re trying to achieve with diversification across a number of different risk factors.”
He added: “The key is that you acknowledge the complexity of what you’re trying to capture with your strategy.
Pension schemes are increasingly moving away from viewing assets in binary growth or matching terms, according to Van Zyl, who added: “There is quite a strong drive not to just have two big buckets. You have your three or four key objectives and then [must be] really clear on what you want to achieve and what assets will achieve that.”
“People are being much more granular,” he said, but added: “You need to be careful that your categorisation doesn’t drive your strategy.”
Conrad Holmboe, investment consultant at Redington, said there were advantages to the different categories used by the scheme.
He said: “Building an income stream with contractual cash flows is a useful way to manage liquidity needs and ensure benefits can be paid – the question is how to blend risk-and-return to achieve the right level of growth required to meet funding objectives”
However, he added: “While it is true that growth assets do not behave in the same way as the liabilities, a number of the assets within the income bucket will provide both an element of liability matching and growth.”
Holmboe gave the example of corporate bonds. “[They] will help reduce the liabilities’ sensitivity to interest rates and [provide] a credit spread, which can help reduce the deficit.
“It will be interesting to see how the new categories allow for these overlaps,” he added.
