Changes to the Investment Strategy

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In September the Committee considered a three year de-risking plan to reduce the level of risk within the Scheme’s portfolio and agreed two stages. Firstly, an immediate reduction to the Scheme’s growth asset allocation from 70% to 65%, this has now been completed. Then, secondly to consider, at the December Committee meeting, updated funding level triggers covering the period to the next valuation.

The Committee has now agreed a new de-risking plan using triggers based on the Scheme funding level. Starting at the current level of 65%, the growth asset allocation will be adjusted when certain “solvency” funding levels are reached. The triggers and adjustments are set out below: 

Funding level  triggers   'Solvency' Funding Level  Growth asset allocation
 30 September 2015 40%   70%
 30 September 2016 38% (estimated)  65% 
 Trigger 1  44% 63% 
 Trigger 2  48%  60%
 Trigger 3  52%  57%
 Trigger 4  56%  53%
 Trigger 5  60%  50%

The ‘solvency’ funding position relates to the cost of settling the benefits in full with an insurance company. If we translate this to the ‘ongoing’ funding basis (in other words how we fund the scheme as a going concern), achieving Trigger 1 by September 2018 would be considered on track and Trigger 3 would represent approximately 100% funding The Committee will keep the de-risking plan under review.

The Committee also agreed to increase the interest rate hedging; to hedge 100% of the Scheme’s funded liabilities and therefore reduce the level of risk and volatility.

In order to move towards this target around 25% of the Scheme’s physical equity holding (just under 9% of the total assets) will be replaced with ‘synthetic equities’ exposure. The aim of the ‘synthetic equity’ strategy is to free up capital by replacing physical equity holdings with a derivative position, backed by cash used for collateral. This does not reduce the expected return on the assets however the freed up capital is used to increase the holding of defensive ‘Liability Driven Investment’ assets to reduce the volatility of the Scheme’s funding position.

This change to the investment strategy has no impact on the 2015 valuation outcome.

Further background will be provided at the April 2017 Employer Forums. 
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