In Britain, a Dichotomy in Pension Fund Investment Performance

British final salary schemes with surpluses increased their funding status in August, according to new figures; the same, however, cannot be said for underfunded plans.

(September 10, 2009) – The best are getting better and the worst worse, according to recent figures on United Kingdom (UK) defined benefit (DB) pension scheme funding levels.

According to the Pension Protection Fund (PPF), August brought with it, on average, worsening funding positions for the 7,400 DB schemes tracked by the PPF with its 7800 Index. At the end of the final month of summer, the DB schemes covered had a total deficit of £173.2 billion, compared to a £158.1 billion deficit seen at the end of July.

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Interestingly, August saw a spread between those pensions running a deficit and those running a surplus. According to PPF, the entirety of deficits by schemes running deficit increased—going to £194.6 billion from £179 billion—while the total surplus of funds running a surplus increased from £20.9 billion to £21.4 billion.

This announcement, highlighting a dichotomy of performance by UK pension funds, comes on the heels of an equally negative report regarding de-risking at British pensions. According to consulting firm Hymans Robertson, half of British defined benefit pension schemes have failed to design a long-term strategy for risk reduction, despite 80% believing there is a need to do so.

Furthermore, while 75% of those surveyed had reduced investment risks at the stock market’s 2007 highs, risk aversion seems to prevail in the current environment, with only 45% of funds claiming that they have procedures in place to lock in returns from a rebounding equities market.

To contact the <em>aiCIO</em> editor of this story: Kristopher McDaniel at <a href='mailto:kmcdaniel@assetinternational.com'>kmcdaniel@assetinternational.com</a>

Korea and Barclays, Sensing an Opening, Pounce on Resources

In further evidence of the resurgence in resources and the willingness of SWF to partner with western investors, British bank Barclays is in talks with the South Korean Natural Resources Fund about joint investments in Africa, Asia, and Latin America.

(September 10, 2009) – Barclays, a close friend to sovereign wealth funds in the economic downturn, is set to allow such investors the ability to invest in natural resources alongside the British bank.

The South Korea Natural Resource Fund, multiple news sources are reporting, is in talks with Barclays—which has put upward of $1 billion into its natural resources unit over the past four years—about a $400 million investment tagged for natural resource allocation in Africa, Asia, and Latin America. The target investments would be physical assets and resources such as mines, power plants, and oil fields. The goal, it is reported, would be to hold such assets for three to five years before exiting.

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The talks, if successful, would echo a move by Chinese government funds, which have gone heavily into oil in recent years; the move also would signal an increasing belief that resource prices—recently pummeled by a bursting bubble and the global decrease in demand—are set to rebound. Fears of inflation following liquidity injections across the globe also are seen as driving investors into hard assets.

The potential venture between Barclays and the South Korean fund would be further evidence of many SWFs’ willingness to work with western-based investors. Part political, part strategic, this arrangement has been seen with many funds as of late, including the Abu Dhabi-based Mubadala’s partnership with Malaysia Development in a Malaysian energy and real estate deal worth upward of $1 billion; France’s Fonds Stratégique d’Investissement possible joint venture with Mubadala in the French biotechnology field; Korea Investment Corporation’s agreement with Malaysia’s Khazanah Nasional and the Australian QIC; and the joint venture backing Blackrock’s purchase of Barclays Global Investors formed by Chinese, Singaporean, and Kuwaiti SWFs.

The ties between Barclays and SWFs are especially tight. During the economic downturn, the bank sought and found investments from Abu Dhabi and Qatar wealth funds, avoiding British government intervention.

To contact the <em>aiCIO</em> editor of this story: Kristopher McDaniel at <a href='mailto:kmcdaniel@assetinternational.com'>kmcdaniel@assetinternational.com</a>