UK Pensions Improve Funded Status in October

UK’s private pension plans continued to improve their funded status in October, as assets rose while liabilities fell for the second consecutive month, according to JLT Employee Benefits (JLT).

JLT said that buoyant equity markets have continued to boost defined benefit pension plans, as deficits continue to decline—despite concerns over rising inflation.

“However, many challenges still remain,” said Charles Cowling, director, JLT Employee Benefits, in a release. “Pension schemes which are carrying out actuarial valuations in 2017 are likely to show bigger deficits than in 2014,” he said, adding that “trustees and finance directors may wish to take advantage of these slightly calmer waters to explore opportunities to offload and settle pension liabilities.”

As of Oct. 31, JLT estimated that the funding level of all UK private-sector pension plans had increased to 91% from 90% at the end of September, and up from 84% at the same time last year. Total assets for the plans topped out at £1.586 trillion, compared to £1.558 trillion at the end of September, and £1.527 trillion at the end of October 2016. Liabilities for the plans edged up to £1.74 trillion from £1.737 the previous month, but were down from £1.809 trillion at the same time last year.

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This resulted in the deficit for all UK private-sector pension plans falling to £154 billion from £179 billion at the end of the previous month, and is down £128 billion from £282 billion as of Oct. 31, 2016.

For the FTSE 100 companies, the funding level rose 2% during the month to 95% at the end of October, compared to 87% at the end of October 2016. Assets grew £9 billion to £673 billion from the end of September, and were up £30 billion from the £643 billion in assets reported in the year-ago period. Meanwhile, liabilities for the FTSE 100 pension funds increased £1 billion during the month to £712 billion, but dropped from £738 billion at the end of October 2016.

The deficit for the FTSE 100 companies fell £8 billion to £39 billion from the previous month, and was down £56 billion from £95 in the year-ago period.

And for the FTSE 350 companies, the funding level gained 1% during the month to 94% at the end of October, and was up 7% from the same time last year. Total assets for the group were £760 billion as of Oct. 31, compared to £749 billion at the end of September, and £729 billion at the end of October 2016. Total liabilities increased by $1 billion during the month to £809 billion, but were down from £841 billion at the same time the previous year.

As a result, the deficit for the FTSE 350 pension funds fell £10 billion during the month to £49 billion, and has been reduced by more than half from £112 billion at the end of October last year.

Tags: JLT Employee Benefits, Pension, UK

Hedge funds continue to play a role in institutional investment portfolios, despite the bad rap the industry has endured over the past few years. Various foundations and endowments served as panelists and shared their perspectives on how they incorporate hedge funds within their overall investment framework, their manager expectations, and opportunities going forward at Agecroft’s Hedge Fund Investor Leadership Summit held in New York November 2- 3.

“We eliminated the term ‘hedge fund’ from the [investment] policy and we took it out of every document that we had, partly because of the negative trust/bias that’s seen,” said Jonathan Hook, CIO of the $2.3 billion Harry and Jeanette Weinberg Foundation, on a panel discussion. “We really think about hedge funds not as an asset class, but trying to get specific exposures into the portfolio and not trying to fill up buckets.”

Conversely, the $1.3 billion UJA-Federation of New York has about a 35% allocation to the asset class, according to CIO Colin Ambrose. “We’re looking at [hedge funds] from an opportunistic perspective, we’re trying to get uncorrelated return streams.” The fund focuses on managers who can generate alpha, where shorting positions tends to play a large role in achieving its goals.

In lieu of a more traditional asset allocation strategy, Verger Capital Management allocates its portfolio through 25 risk factors, which include duration, liquidity, momentum, and growth. “We try to find hedge funds that can do things for us that are unique to our asset allocation model,” said Jim Dunn, CEO and CIO of Verger, which, among other names, manages Wake Forest’s $700 million endowment.

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Manager Traits

Outside of fees, panelists expressed the importance of building long-term relationships with their hedge fund managers and partnering with firms that are not simply looking to accumulate assets. Other traits panelists sought in their hedge fund managers included:

Transparency/communication
Consistency
Alignment of interest
Flexibility
Diversity

“We’re looking for managers that [do not have] the same look, or feel, or thought process,” asserted Dunn. “We’re trying to carve out from our portfolio different perspectives. A different way of thinking about the market.”

Hook agreed. “There’s a lot of clutter out there, so how you distinguish yourself as a firm, when you’re coming to talk to potential LPs, is an important thing to do,” he said.

Hook also expressed the importance of keeping the manager count down. “There’s a lot of folks in the E&F community who are guilty of proliferation in the number of managers. … We’ve got 38 today, and we’ll probably keep the number in the 40s.”

The plan prefers larger allocations with each of its managers. “So, that also entails us thinking about the role each manager is playing, because we’re not just adding a little bit of everything across the board,” he said.

Industry Outlook

The surge in pricing and demand for crypto-currencies, the wave of big data infiltrating the industry, and how portfolio managers utilize data sets were areas of focus cited by some of the panelists.

Further, the increasing presence of firms such as Amazon and understanding the potential portfolio implications is something Hook will keep an eye out for. “Not today, but go two or three iterations out, does Amazon eat all of corporate America? … There’s probably a bigger chance of a few firms really dominating in ways we haven’t seen industries get dominated,” he said.

For Verger, climate change and how it has disrupted the market is an area the fund keenly monitors. Dunn argued that climate change will have implications across asset classes and not just in environmental, social, and governance (ESG)- oriented portfolios. Sharing the example of autonomous vehicles, Dunn questioned how such technology might impact areas within infrastructure and the insurance industry.

Other funds, such as the Episcopalian NY Diocesan Investment Trust, are exploring opportunities with a geographic focus rather on a specific sector or strategy.. “We are little north of where we should be in our investment policy guidelines for global large-cap equities. … So, we’re slowly decamping from US-equity-focused hedge fund managers and pushing more money to Asia, Japan, China, because we can change the exposure without messing [with] policy guidelines,” John Trammell, president of the trust, said.

Tags: Agecroft Partners, Hedge Fund Investor Leadership Summit, Hedge Funds

Agecroft: Hedge Funds Still Playing Key Role in E&F Portfolios