Jack Jones examines changes to the Environment Agency pension fund's investment strategy.
It has been a successful few years for the Environment Agency’s £1.9bn pension fund. It achieved a return of 5.1% last year – almost double the average of the 89 Local Government Pension Schemes – and had an annualised performance of 16.1% over the last three years.
But despite these strong figures, the fund has chosen to overhaul its investment strategy, shifting significantly from gilts into corporate bonds, reducing its equity allocation and almost tripling its investments in property, farmland and infrastructure.
Alongside this it has redoubled efforts to make its portfolio ethically sound with a plan to double investments in the ‘green economy’, which should account for a quarter of its assets by 2015.
Head of environmental finance and pension fund management at the agency Howard Pearce says the new strategy is designed to improve risk-adjusted returns, increase diversification, respond to difficult economic conditions and strengthen the fund’s commitment to be a responsible investor.
He says: “We’ve basically had a fixed investment strategy since 2005 and it’s been performing well. This move is the next step in our financially and environmentally responsible investment strategy. We began introducing these factors in 2001 and at each review period since then we’ve found that the strategy works for us and have learnt from our experience.”
EAPF target allocations
The current strategy
Over the last decade, the fund’s portfolio has followed the de-risking pattern familiar to most maturing pension schemes, steadily reducing its equity allocation from 86% to 63%. At the same time it has increased its exposure to bonds and gilts from 8% and 2% to 12% and 15% respectively while introducing property and private equity mandates that now account for 3% and 5% of the portfolio.
Over the same period the fund has paid increasing attention to its environmental impact and carbon footprint. It says these were 6% and 25% lower respectively than its benchmarks for its active equity investments while its active bond portfolio was 23% more efficient than its benchmark with a carbon footprint 30% lower.
The Pensions Regulator (TPR) has set out plans to use "new regulatory initiatives" with over 1,000 schemes as it aims to tighten its regulatory grip and boost member outcomes.
HM Revenue and Customs (HMRC) has announced it is delaying the provision of data that will enable pension schemes to confirm the guaranteed minimum pension (GMP) benefits to pay to members until the end of the year.
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