Pension investments

Investment update - March 2018

Welcome to 2018's first edition of Investment update - an opportunity to share our investment news and latest performance figures with you. 

Market update

While the last quarter of 2017 was a relatively uneventful one for capital markets, with equity and bond markets continuing the long-running theme of strong positive performance, markets have seen increased bouts of volatility since the start of 2018. Global equity values are down by 0.7% in Sterling terms, and we expect to see more frequent bouts of volatility in 2018, given the impending tightening of monetary policy in developed markets. 

You will see from the performance figures below that investment returns have been high over the last five years. On the defined benefit (DB) front, equity performance has been a leading contributor. Our strategy for the DB Growth Portfolio is to continue diversifying away from equities by sourcing a range of suitable alternative investments. We believe that this strategy continues to be appropriate, given the current valuations of equities and the increasing volatility in markets. 

Improved reporting

TPT has been investing in new systems which have allowed us to upgrade our quarterly DB Investment and Funding Reports. The new reports provide a much clearer picture of how each scheme is performing, with more scheme-specific data covering funding level projections, performance attribution and risk analysis. Once the new reports have bedded in, we will be focusing on speeding up our report delivery times, which I know is a focus for a number of you. 

I hope you like the new look of the reports, but we are aware that there is always scope to improve. The reports are for you and we are keen to incorporate your views into future versions.

Member roadshows

We are also excited about TPT's introduction of member roadshows, which took place in early March. They gave members the opportunity to ask us and Chair of the Trustee Board, Sarah Smart, their questions on topics including: 

- The role of the Trustee Board and how it works on your behalf;
- How you can shape the future of TPT;
- How to get the most out of scheme membership;
- What members are telling us and how we are responding; and
- Our approach to responsible investment..

Although several of the sessions were unfortunately hampered by the weather, we are looking into the possibility of running further roadshows later this year. If you would like more information, please email memberroadshows@tpt.org.uk.

I hope you enjoy this edition of Investment Update and if you have any thoughts on what you’d like to see in future edition, then please get in touch.

Cliff Speed
CIO, TPT Retirement Solutions


How our defined benefit assets performed

Overall, TPT achieved strong asset returns over both a one year and five year period. As we discuss in the market outlook section, equities have been the key contributor for growth assets, but we are also pleased with the overall performance of many of our alternative growth asset classes.
 
In the last year, liability values have risen by 3.1% as gilt yields remain low. Our Liability Focused Assets (LFAs) are designed to track liability values (and therefore limit funding level volatility) and these have kept pace, returning 3.9% over one year, thereby helping to mitigate the impact of these rising liabilities on scheme funding levels.

DB Assets performed
DB chart - march 2018 update
* Since inception, May 2013
** Shown as an approximate return on average scheme liabilities
 
We actively monitor the performance of our assets as well as the performance of the underlying managers. This enables us to understand the underlying factors driving performance, and to measure how the strategy is performing as a whole and whether each investment manager is delivering on its objective.
 

How our defined contribution assets performed

The table below shows the performance of a selected range of Target Date Funds.

DC funds benchmark - march 2018
*Since 28 February 2013 (annualised)
All vintages of TDFs recorded positive performance in the quarter. All funds beyond 2017-2019 have outperformed their benchmarks* over the past 12 months. Since inception, all funds have significantly exceeded their benchmarks*.
 
These benchmarks are the Consumer Price Index, plus a percentage. For the longest dated fund, this is CPI + 4% p.a.
 


Market Outlook

Valuations of global equity markets remain high, particular in the US and the Eurozone, despite some minor falls reflecting mounting tensions between the United States and North Korea, and worries about the potential impact of recent extreme weather events on the US economy.  

Despite market expectations of a Bank of England rate rise, UK bond yields continue to remain low, with current yield curves only implying a modest rise in long-term rates over the next few years. On the back of the devastation caused by the hurricanes, ten year US Treasury yields fell for the first time since last November.

Given the low rate environment, we continue to believe that schemes should protect their funding levels from changes in long-dated government bond yields and we have been transitioning assets out of gilts into LDI funds on a Scheme by Scheme basis to help raise protection levels. We have also put in place a synthetic equity strategy, this allows capital to be released from equities and re-allocated whilst still retaining ‘synthetic’ equity exposure. The released capital means we are able to increase protection further.

As patient long-term investors, we seek to structure our investments so that they are sufficiently robust to weather storms and it is pleasing that our investments have performed well through recent political events and at a time when liability values have been rising significantly.

 

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