Tower Hamlets completes £700m equity protection strategy

Schroders worked in partnership with the pension fund and its consultant Mercer to replicate the exposures of LBTH’s growth portfolio, while also releasing capital to be used as collateral for the equity risk management strategy, completing the solution in September.

This maintained the pension scheme’s exposure to potential upside gains, while also mitigating downside risk. The structure of this equity replication was also designed with the aim of minimising LBTH’s trading costs.

Neville Murton, acting corporate director for resources at London Borough of Tower Hamlets, said this investment strategy provides more certainty around the outcome of the March 31 2019 formal actuarial valuation. He added that it also protects against the risk of a significant fall in equities given increased volatility in markets and concerns regarding stretched valuations.

“LBTH’s funding level has improved materially since the last valuation, so the fund implemented the equity protection strategy from a position of relative strength. The strategy implementation was just in time to lock in high market levels before the recent market fall; therefore the strategy is in a good position to deliver additional savings,” Murton said.

Steve Turner, partner at Mercer, commented: "The protection has already demonstrated its value in the recent equity market turmoil seen since early October, by helping insulate the fund from equity market volatility. Key stakeholders can sleep a lot easier with the strategy in place, whilst still retaining good levels of return upside.”

The design and creation of a custom-made pooled fund by Schroders minimised LBTH’s administrative and governance requirements, while also maximising the strategy’s speed to market.

Earlier this year, Schroders delivered a £2.6bn equity risk management strategy for the South Yorkshire Pensions Authority, which is believed to be one of the largest of its type undertaken by a local authority.