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The Pensions Trust's Liability-Led Investment Structure

Issued: 13 September 2004

The Pensions Trust, the £2.2bn industry-wide scheme for the charitable, voluntary and not-for-profit sector, is to implement a new liability-led investment structure in response to recommendations put forward by the Myners' review.

The scheme previously used the WM all funds average peer group benchmark for the defined benefit and defined contribution schemes, plus a career average revalued earnings scheme it administers for nearly 4,000 employers.

Its move demonstrates the growing acceptance of liability-led investing among UK schemes.

Pensions Trust chief executive, Richard Stroud, told PW the change was prompted by a realisation that the liability profiles of its different member schemes are diverging, and by the recommendation of the Myners' review.

An investment review by Mercer Investment Consulting led to a recommendation for four investment strategy groups with differing equity/bond and property splits, ranging from a 75/25 split to a 30/70 split.

But following consultation with employers in the last year, this has been adapted to allow individual schemes bespoke investment strategies.

Under the new structure, schemes can vary from completely matching their liabilities with bonds, to an aggressive equity allocation if they wish.

"Some employers want to be more defensive, some employers want to be more aggressive," Stroud said. "We take the view that's fine, provided they know what they are doing."

He said the new structure, which uses nine fund managers, would be extremely cost-effective for schemes: "Our investment costs are running at about 21 basis points overall. We are looking for a measure of outperformance, with very low volatility around the expected return. If a manager doesn't perform, we will replace them."

Stroud added that for a £200m scheme, it would be hard to get investment costs under 30 basis points using a single manager, while manager-of-managers usually charge from 50 to 100 basis points.

Pensions Trust head of finance, Mark Rogerson, said the investment structure had two layers - a first layer of a balancing index fund with Legal & General covering global equities and bonds, and a second layer of specialist managers with mandates to outperform.

Compared to Pensions Trust's old investment structure, Morley Fund Management and Standard Life have gained global bond mandates of £291m and £79m respectively, with Henderson Global Investors dropped as bond manager.

Stroud added that implementing the new structure in its entirety would take up to two years.

He said: "We are working with Northern Trust as our custodian and Legal & General as a balancing passive manager, and KPMG as accountants. We are about to go live in a couple of weeks."

Pensions Trust's investment portfolio as at September 2004

Manager Portfolio Sep-03
Legal & General Balanced index-tracking 924 947
Fidelity UK equities/UK & European equities 223 232
BGI Overseas equities
(ex UK)
193 294
Capital Int'l Overseas equities
(ex UK)
251 239
Henderson GI Global bonds 240 0
Morley FM Global bonds 0 291
Standard Life Global bonds 0 79
CB Richard Ellis Direct property 94 100
ISIS Ethical 17 22
Other ~ 10 26
Total ~ 1,952 2,230

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This feature has been published in:

Pensions Week
20 September 2004
'PT to implement liability-led investment structure'
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