The Best Pension Performance Since Lehman?

Few institutional investors have shown a 25% investment return over the last five years – especially in the public sector.

(October 22, 2012) — The Pension Protection Fund (PPF), the lifeboat for bankrupt company pension schemes in the United Kingdom, made a 25% return on its investments in the 12 months to the end of Marchone of the highest returns in the sector since the collapse of Lehman Brothers in 2008.

Through a series of hedging strategies and return-seeking asset investments the fund made returns of £1.7 billion according to its annual report, which was released today

The PPF’s performance is one of the highest made by a pension fundor any other institutional investor with definite liabilitiesover the last five years. Across the calendar year 2011, the highly sophisticated Danish national pension fund ATP made a pre-tax investment return of 26%, its highest ever, against a backdrop of lacklustre performance by peers due to difficult market conditions.

In an interview in March, the fund’s then-CIO, Ian McKinlay, told aiCIO: “The substantive effects of the decisions we made came into effect in the summer [of 2011]18 months ahead of schedule, which we were pleased with. We reduced our 20% equity allocation to 10%, by selling off the majority of our UK holding, and moved the allocation to alternatives.”

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In March, the fund had a target allocation of 20% distributed between private equity, distressed debt, global real estate, GTAA and infrastructure.

McKinlay added: “To hedge our liabilities we use repos, which is unusual for a UK pension fund although some European funds do it, with which we have a very diverse range of counterparties, maturities and date ranges. We are one of the largest players in this field.”

The PPF also uses sophisticated tail-risk hedges and has been put through several scenarios ranging from the collapse of the euro to a surprise interest rate hike.

In June, aiCIO broke the news that McKinlay had left the PPF for a new role running the staff pensions at UK insurer Aviva.

The 12 months to the end of March were some of the most volatile seen since the collapse of investment bank Lehman Brothers in 2008. Over that year-long period the MSCI World Index fell 1.72%.

Lady Barbara Judge, PPF chairman, said: “We cannot rest on our laurels, however. Already this year, we have seen claims on the PPF of more than £700 million – and a significant deterioration in the deficits of many of the other pension schemes that we protect. We are determined, however, that the PPF should remain strong enough to weather these storms.”

Through compulsory levy payments made by UK pension funds and new schemes being admitted to the organisation, the PPF grew by £4.7 billion over the 12 months. This took total assets to £11.1 billion and notching up a surplus of over £1 billion over its liabilities.

The PPF compels all pension funds in the UK that would rely on it to rescue their members to pay a levy to help bolster funds. This levy is based on the funding level of a scheme and the risk taken in its investment portfolio. This year, due to significant deficits in funding levels partly as a result of falling bond yields, the PPF announced a 15% increase in the levy to battle potentially larger numbers of bankrupt schemes seeking assistance.

Alan Rubenstein, CEO of the PPF, said: “While we are still on course to meet our aims of being self-sufficient by 2030, the probability of achieving this fell during the year from 87% to 84%. Although this figure is still above our comfort level, we remain ever vigilant about events which will reduce this probability even further.”

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