The £1.03 billion ($1.72 billion) Superannuation Arrangements of the University of London (SAUL) is one of a dwindling number of UK defined benefit plans that is still open to new members. Kristen Paech talks to Penny Green, chief executive of the fund, about the importance of manager selection and the advantages of being an open plan.
Five years ago, when markets were booming, it was hard to decipher between skill and luck when it came to picking investment managers.
Today, the challenge is no longer differentiating between managers but rather accessing those that are skillful, according to Penny Green, chief executive officer of SAUL.
“This is a fantastic time for nimble investors to find skilled managers,” she says.
“The shake out in the market has revealed those managers who have been lucky but because the markets were performing appeared skillful, and now those managers that are performing, you can be confident are genuinely
skillful. Because they’re easily identified, it becomes much more difficult to access them unless you can operate nimbly.”
Just as important as identifying managers that are skilled is the ability to pick out those that are vulnerable, Green adds.
“We don’t think we’ve got any [vulnerable managers], but we need to work carefully with our managers to make sure we continue to deliver, so that when we reach 2011 our funding position has not deteriorated, she says.
The fund’s last actuarial valuation on March 31, 2008 indicated SAUL was 100 per cent funded.
In the UK, it is a requirement to carry out a valuation every three years, and if a deficit is revealed, a recovery plan must be agreed with the scheme’s employer and filed with the Pensions Regulator.
While many of the UK’s DB plans have been wound up over ecent years, SAUL remains open to new contributing members, keeping the average member age low and allowing costs to be spread across a broader membership base.
“We have a strong employer covenant, and being an open DB plan means we can take the longer term view,” Green says.
“The volatility we’ve experienced is extreme” so undoubtedly our funding position is under stress, but we anticipate that as we can take a longer term view we’ll be able to work with our employers and our funding position will be restored with less pain than other plans might experience.”
This long term view is also evident in the pension fund’s investment strategy, which comprises 35 per cent risk-reducing assets like index-linked gilts (UK government bonds), conventional and global bonds, high lease-to-value property and income-producing equities, and 65 per cent return-seeking assets split equally between conventional equity and absolute return strategies.
Green says this asset split and diversification, coupled with strong managers which delivered solid performance amid the volatile conditions, contributed to the fund’s annual return of -1 per cent in 2008.
Ordinarily a negative return is nothing to rejoice about. But these days, most savvy members would be content with SAUL’s return for 2008 – one of the most tumultuous years in history.
The result was slightly below the benchmark of 1.6 per cent due to weak stock market performance, and negative growth in UK property assets. However the defined benefit (DB) fund’s return has averaged 5.7 per cent per year over the last 10 years, exceeding its long term benchmark of 5 per cent.
“Looking at the way equity markets have performed across the world our investment strategy has protected us to an extent,” Green says.
“[We have] an investment belief that assets sit on a continuum which starts from the most conservative – most closely linked to liabilities – through to on the other extreme, assets that are least closely linked to liabilities and least liquid. We draw a fairly arbitrary dividing line between those two on that continuum.”
On the return-seeking side, SAUL invests in both passive and active UK equities managed on a benchmark-relative basis, and then five unconstrained equity mandates. The fund also has a pure alternatives portfolio, which includes hedge fund of funds, private equity, commodities, senior debt, high yield and emerging market bonds, frontier equities and volatility strategies.
“The manager has complete discretion to move around the asset classes within a tightly defined framework,” Green says.
“[The manager] can’t hold UK equities and couldn’t hold government bonds or corporate bonds that have a widely acknowledged market index.”
Private equity and infrastructure are two areas where Green believes there are opportunities in the current environment.
In line with this view, Partners Group and Macquarie were recently appointed for private equity and infrastructure mandates.
“One doesn’t like to profit from others’ misery but if you are able to look opportunistically then certainly investments in the distressed space would be good,” she says.
“I do firmly believe it’s a good time for private equity, and infrastructure, given the fiscal stimuli packages around the world, is bound to be a beneficiary from that.”
SAUL is a defined benefit or ‘final salary’ pension scheme, and was established in 1976. The membership consists mostly of clerical and manual staff in the colleges of the University of London and associated institutions. In 2008 there were 9,764 active members, 10,940 deferred members and 6,867 pensioners in the scheme, and 52 employers participating in SAUL.
Asset allocation (December 2008)
UK equities 37.5%
UK bonds 17.5%
Overseas equities 25.5%
Overseas bonds 7.5%