UK - Industry responses to the Pension Protection Fund's (PPF) Statement of Investment Principles (SIP) have been mixed, with one critic saying that its cautious LDI approach could impact badly on the equity markets.
Partha Dasgupta, PPF chief executive, said yesterday that the fund had "adopted a dynamic, bespoke liability driven approach with a diversified asset portfolio" in order to "provide security for pension scheme members while seeking to enhance value in the longer term for the levy payer by out-performing the liabilities and limiting downside risk".
The PPF also said it would use derivatives to enhance returns, target a 1.4% p.a. out-performance over the benchmark and planned the following asset allocation: 20% cash; 50% global bonds; 12.5% UK equities; 7.5% global equities; 7.5% property and 2.5% currency overlay.
However, their SIP was criticised by Colin Mouqué, director of actuarial services at Alexander Forbes Financial Services. "They are looking for a 1.4% return in excess of their modest benchmark," he said. "If you measure performance against inflation and the FTS100 index as most people will, they could end up with a very disappointing result."
He continued: "Given the nature of their liabilities, they could have adopted a longer-term approach with a higher equity content. I am worried that this investment strategy could have a negative impact on the equity markets, especially in difficult times. Perhaps they are too worried about winning short term battles at the expense of the overall war against deficits."
Nevertheless, some welcomed the PPF's softly-softly approach. Ken Willis, investment partner at Lane Clark & Peacock said: "The PPF's updated SIP makes welcome reading for trustees and corporate sponsors as it echoes and signposts what we have being telling our clients for some time - the key features of any investment policy should focus on the liabilities, consider removing/reducing unrewarded risks, diversify returns and be more dynamic."
He added: "The PPF's use of derivatives will also help trustees and sponsors understand that such approaches are now mainstream and will help further the discussion for more modern risk management techniques within pension scheme's investment policies."
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