UK pension buffer eyes private equity

The UK agency which steps in to pay pensions when a firm goes bust has earmarked up to a quarter of assets to alternatives like hedge fund-style products and private equity as it seeks to boost diversification and returns.

The Pension Protection Fund (PPF) said on Wednesday it would halve its equities exposure as it builds a strategic allocation of 20 percent to the new asset classes. That allocation could go as high as 25 percent at times of greatest opportunity, it said.

Previous exposure to alternative asset classes was limited to 10 percent in real estate and currency.

PPF chief investment officer Ian McKinlay said the fund was "very deliberately" aiming to differentiate itself from other pension schemes, which still tend to have very modest allocations to alternative asset classes. 

"Even though we are investing in private equity and infrastructure we are doing so in a very controlled fashion and we will continue with our hedging programme that served us very well through the crisis" McKinlay told Reuters.

He said the allocation would continue to encompass real estate and would also target absolute return funds which use hedge fund-like tactics.

In its updated statement of investment principles published on Wednesday, the PPF increased its targeted annual benchmark out performance to 1.8 percent from 1.4 percent previously as its assets approach 4 billion pounds ($6 billion).

As part of the new investment strategy the scheme has lined-up private equity managers, McKinlay said.

"We have identified the managers we would like to dobusiness with. We are in the process of finessing the investment management agreements" he said.

He declined to name the managers or specify a time frame.

McKinlay said the scheme would still invest about 65 percent of its portfolio in cash and bonds, hedging liabilities through interest rate and inflation swaps. The fund has cut to 10 percent its strategic allocation to listed equities.

McKinlay said the PPF was looking at ways to mitigate the risks posed by retirees living longer than anticipated. The market for managing longevity risk has seen an escalation indeal activity, with carmaker BMW most recently offloading 3 billion pounds of risk from its UK pension scheme to Deutsche Bank.

"Behind the scenes, this is something we are looking at. If it worked for us, it would be something we would consider seriously" he said.

Set up in 2005, the PPF takes on the assets and liabilities of pension funds that fall under its jurisdiction and charges a levy to those schemes potentially eligible for its help. ($1 = 0.6702 pound)