UK’s pension lifeboat fund slashes equity allocation

The UK government-backed fund designed to protects savers in company pension plans has slashed its exposure to equities by one-third and moved money into infrastructure and forestry, as it tries to protect itself against persistently high inflation.

The Pension Protection Fund, one of the largest pension funds in the UK with £39bn in assets, has in recent months reduced its equities target, which includes global and UK holdings, from 9 per cent to 6 per cent, its chief investment officer told the Financial Times.

“The stickiness of inflation continues to worry me,” Barry Kenneth said in an interview. “The longer inflation stays high, the longer interest rates stay high, the more of a challenging environment it will be for many of the assets we hold.”

The asset shake-up comes as central bankers around the world struggle to tame inflation, which remains well above target despite a series of sharp interest rate rises. 

Last week, chancellor Jeremy Hunt backed further interest rate rises to get prices under control, even if the intervention precipitated a recession. UK inflation in April fell to 8.7 per cent, well above the Bank of England’s forecast of 8.4 per cent. High inflation has historically often hurt equity returns, particularly growth stocks.

The move also comes as the UK government considers ways to try to increase pension funds’ backing of UK companies, including increasing tax incentives for investment in UK business or pooling funds to generate greater investment scale.

The pension lifeboat, which has 300,000 members and whose investments are managed independently of the government, takes over the assets and liabilities of failing pension schemes.

At the same time the PPF has increased its infrastructure allocation from 2.5 per cent to 4.5 per cent and its forestry, farms and agriculture holding from 2 per cent to 3 per cent, taking the latter to more than a billion pounds invested.

“Some of our real estate exposure is inflation-linked,” said Kenneth. “So we do have additional inflation protection within the book. So that gives me some comfort if inflation remains sticky.”

The drive into private markets echoes asset rebalancing by other “defined benefit” style retirement funds where pension payments to members are guaranteed and typically have some inflation protection.

Tony English, an adviser at Mercer to UK Local Government Pension Schemes, expects an overall increased allocation to real assets by public sector plans, particularly where inflation liabilities are uncapped.

Ministers are considering an expansion of the lifeboat’s role in an effort to spearhead more investment into UK growth areas, such as private equity and venture capital. The PPF is supportive of the plans to allow it to take on hundreds of struggling schemes without them having to fail first. 

Meanwhile, pension fund managers are preparing for downgrades in their private equity portfolios in the event of a downturn. In 2022, about £2bn of the PPF’s £37bn fund was exposed to private equity.

Kenneth said he would expect “some impact on the PE portfolio”, should a downturn play out. 

“Our PE portfolio is made up of both private equity funds and funds of PE funds. The latter [funds of PE funds] is where I would expect to see a valuation impact but possibly less than that of listed equities as the PE portfolio is hugely diverse,” he said.