A decade on: The evolution of the PPF

Ten years in and our financial strength continues to grow through prudent and effective management of our balance sheet, to which our investment strategy is fundamental.

We aim to strike a balance between protecting compensation payments for current and future members of the PPF, while setting a fair and proportional levy.

Figures from our latest annual report show during 2014/15 our invested assets have returned 4.9 per cent a year for the three-year period to 31 March 2015, outperforming their liability benchmark by 2.5 per cent.

Our assets continued to grow through the year, incorporating the transfer of assets from schemes entering the PPF, levy collection and investment returns. 

Adapting to changing market conditions

The PPF’s investment strategy is constantly evolving and in July 2014 we published the new statement of investment principles.

The previous approach was to focus the asset allocation on matching the liability profile, albeit while simultaneously seeking opportunities for excess return.

However, as part of our evolution the PPF is moving towards a hybrid asset allocation strategy, allocating more of the capital to less liquid assets where the fund receives excess return and liability-matching properties.

Previously we had treated these characteristics as distinct parts of our asset allocation.

Investing in hybrid assets enables us to adapt to changing market conditions and financial regulation by acquiring assets that provide long-term cash flows with less reliance on derivatives.

This allocation should be completed over the next two years, with investment in hybrid assets targeted at 12.5 per cent, cash and bonds moving to 58 per cent (from 70 per cent), alternatives 22.5 per cent (from 20 per cent) and equities to 7 per cent (from 10 per cent).

The new hybrid investments will enable the PPF to overcome regulatory challenges surrounding the central clearing of over-the-counter derivatives.

To date, much of our liability hedging has been through financial instruments rather than real assets. 

For the past decade, providing a pensions lifeboat to those whose employer goes bust has been at the heart of everything we do, and is just as important today

This allocation should be completed over the next two years, with investment in hybrid assets targeted at 12.5 per cent, cash and bonds moving to 58 per cent (from 70 per cent), alternatives 22.5 per cent (from 20 per cent) and equities to 7 per cent (from 10 per cent).

The new hybrid investments will enable the PPF to overcome regulatory challenges surrounding the central clearing of over-the-counter derivatives.

To date, much of our liability hedging has been through financial instruments rather than real assets. 

The PPF’s first significant hybrid asset investment was completed in June 2014, with a direct purchase of a large office building in central Manchester with a long-term lease to an investment grade tenant.

This investment will provide the fund with a lease contract for 23-and-a-half years, with an annual 3 per cent uplift in rental income, providing good liability-matching characteristics.

Taking greater control of the decision-making process

Despite still being predominately outsourced, the PPF is taking greater control of the decision-making process, making more individual asset decisions in-house than has ever been the case.

As the PPF evolves even further, we are considering the feasibility of insourcing aspects of our asset management, meaning we can act against market changes quickly, and have a better understanding of how things affect us more directly.

The timing for implementing this new model will be carefully planned.

We are adopting a phased approach starting with a move to in-house liability-driven investment, because we have a wealth of experience in this area across the team.  

The fund will only insource where it benefits levy payers and members. If we do not think we can perform a function efficiently and effectively in-house, we will not do it for the sake of it.

For example, the management of our small emerging markets allocation is best served by a specialist fund manager.

For the past decade, providing a pensions lifeboat to those whose employer goes bust has been at the heart of everything we do, and is just as important today.

That is why our investment strategy is ever-evolving; growing in size and sophistication, to ensure that the 11 million people who are part of a defined benefit pension scheme will be protected in the face of adversity.

John St Hill is senior portfolio manager at the Pension Protection Fund