“We are slightly unusual,” admits David Adkins, chief investment officer of The Pensions Trust (TPT), the £5.5-billion ($8.7-billion) pension fund founded after the end of World War II to provide retirement benefits for social workers.
Talking from the trust’s Moorgate headquarters in London, Adkins explains how its umbrella structure has grown to provide pensions for 2400 different employers from the charity and voluntary sector as charities have pooled their pension funds over the years.
“We are a one-trust vehicle with only one investment committee, but underlying this are 36 defined benefit schemes. Each one has its own individual investment strategy, some with low allocations to growth and others with high allocations. We have to do 12 valuations a year, which creates significant activity,” he says in reference to different schemes’ triennial valuations.
Current strategy at the fund, which Adkins joined three years ago from Towers Watson, includes hunting more inflation-linked assets in a move encouraged by the strong returns from these types of investments within TPT’s property portfolio. “We are in the process of setting up a fund that goes out and specifically seeks inflation-linked cash flows with a contractual promise that revenues will rise with the retail price index. Assets could include index-linked corporate bonds, infrastructure debt, social housing and property,” he says.
The Pension Trust runs three property mandates comprising a mainstream UK property portfolio, an allocation to European property and a smaller, high lease-to-value vehicle managed by Standard Life, the success of which encouraged the new direction. “We do quite like this,” Adkins enthuses. “The leases are longer than typical, the tenancies are stable and the rental automatically increases with inflation, stipulated in the contract. This is very good for our liabilities and we are looking for more assets like this.” He adds that the trust will increase its allocation to high lease-to-value assets from its European property allocation, which “hasn’t performed the way we hoped”.
Two-thirds passive, one-third active
The Pension Trust’s investments, which include $1.6 billion of defined contribution assets and a “hybrid DC-DB growth plan” are split between a $5.25-billion allocation to growth assets and a $1.9-billion allocation to liability matching assets. The majority of the growth portfolio is invested in global equity, of which two thirds is run passively and one third actively, focused on allocations to Asia and emerging markets. “In my three years, the fund has moved to a passive bias in respect of equities. We recognise that you can find managers that can outperform, but it is difficult to do.” Fundamental indexation, introduced nearly two years ago, now accounts for half of the fund’s passive equity allocation. “We do think this is superior over standard market-cap index tracking,” he says.
Growth assets are also allocated to TPT’s growing alternatives bucket divided between an illiquid and liquid portfolio, a distinction that depends on whether an investment can be turned to cash within six months. The $795-million illiquid bucket includes allocations to property, but also infrastructure and distressed debt. The infrastructure allocation, which Adkins says still hasn’t been fully drawn, is biased towards mature revenue-generating assets rather than development-type projects, although running two mandates means the fund could invest in both. “There is more institutional money chasing infrastructure, but a lot of new infrastructure is also due on stream. There is no obvious supply-and-demand imbalance.”
The liquid allocation is spread across two absolute return funds and an allocation to a fund of hedge funds. More recently, the fund has also invested in emerging market-local currency sovereign debt, managed by Ashmore, and insurance-linked securities. “We do believe in the emerging market story but it’s difficult to know if growth will come from equities, currency or bonds, so our philosophy has been to gain exposure to all three,” says Adkins. Emerging market equity accounts for a 15-per-cent strategic allocation within the broader equity portfolio in an active mandate run by Vontobel. The fund avoids frontier markets for now. “Governance is a concern for us,” he states. “We are not convinced.” The Pension Trust has no allocation to private equity, which Adkins describes as a “geared equity play” and “not the way the fund is travelling.”
Driven by liability
Within the liability matching allocation, TPT has $1.1 billion invested in physical bonds, comprising gilts and corporate bonds. In another recent development, it has also invested $795 million in three bespoke liability-driven investment funds, two of which are for inflation-linked liabilities and one for nominal liabilities, run by BlackRock and in which TPT is the only investor. “If long-term interest rates rise, we will hedge more, but others will be doing the same,” says Adkins. The BlackRock funds are able use a typical range of derivative instruments from plain vanilla swaps to gilt total return swaps and gilt repos, allowing extra duration within the portfolio, he says. Two actively managed corporate bond mandates “add some yield” to the otherwise gilts and swaps-based return.
In other investment themes Adkins plans to increase the scheme’s focus on the impact of climate change on its allocation, looking particularly at the threat around stranded assets. “We are now incorporating ESG factors into our internal manager rating system. We don’t insist our managers sign up to UNRPI, but we encourage them to do so. We don’t want a hard rule; we look at whether they’re following the spirit of UNPRI, even if they’re not actual signatories.” Under his leadership The Pension Trust, battling a $3.1-billion deficit made worse by many member charities unable to make good their pension deficits, strategy has focused on bringing down liabilities with inflation-linked growth assets. “Before, we were very asset-focused, rather than looking at problems around the scheme’s liabilities too. This is one of the things I have really tried to do.”