The British government-backed fund, designed to protect savers in company pension schemes, has cut its equity exposure by a third and shifted funds into infrastructure and forestry to protect itself from persistently high inflation.
The Pension Protection Fund, one of Britain’s largest pension funds with 39 billion pounds in assets, said its chief investment officer had cut its equity target, which includes global and UK holdings, from 9% to 6% in recent months British Financial Times.
“The stickiness of inflation continues to worry me,” Barry Kenneth said in an interview. “The longer inflation stays high and the longer interest rates stay high, the more challenges we face in many of the assets we hold.”
The asset restructuring comes as central bankers around the world struggle to curb inflation, which remains well above target despite a series of sharp hikes in interest rates.
Last week, Chancellor of the Exchequer Jeremy Hunt backed further rate hikes to keep prices in check, even if the intervention would lead to a recession. UK inflation fell to 8.7% in April, well above the Bank of England’s forecast of 8.4%. Historically, high inflation has tended to hurt stock returns, especially growth stocks.
The move also comes as the British government considers ways to increase pension fund support for British companies, including boosting tax incentives for investing in British businesses or pooling funds to generate larger investments.
Pension Lifeboat has 300,000 members and its investments are managed independently of government, taking over the assets and liabilities of failed pension schemes.
At the same time, PPF increased its infrastructure allocation from 2.5% to 4.5%, and its investment in forestry, farms and agriculture from 2% to 3%, taking the latter investment to over £1bn.
“Some of our real estate exposure is tied to inflation,” Kenneth said. “So we do have additional inflation protection on the books. So if inflation remains firm, that would give me some comfort.”
The foray into the private market echoes the rebalancing of assets in other “defined benefit” style pension funds, which pay members a guaranteed pension and often some inflation protection.
Tony English, consultant at Mercer to UK Local Government Pension Schemes, expects public sector schemes to increase allocations to real assets across the board, especially if there is no cap on inflationary liabilities.
Ministers are considering expanding the role of lifeboats in an effort to channel more investment into UK growth areas such as private equity and venture capital. PPF backs schemes that allow it to take on hundreds of struggling schemes without having to fail first.
Meanwhile, pension fund managers are preparing to downgrade their private equity portfolios amid the downturn. Around £2bn of the PPF’s £37bn fund will be invested in private equity in 2022.
Kenneth said he expects “some impact on the private equity portfolio” if the downturn ends.
“Our private equity portfolio is made up of private equity funds and private equity funds. The latter (funds of private equity funds) is where I expect to be impacted by valuations, but probably less than listed equities because the private equity portfolio is very diverse change.”