Cover story – Covid-19 THE PANEL
We are living in interesting times. The Covid virus, largely unheard of on New Year’s Day, has guaranteed that 2020 gets its own chapter in the history books.
Andy Cheseldine is a professional trustee at Capital Cranfield. He sits on the trustee boards of defined contribution (DC) schemes, includ- ing those for Yorkshire & Clydesdale Bank and Vodafone, and defined benefit (DB) schemes, such as Mizuho International. He is the trustee chair of Smart Pension Master Trust.
It has claimed hundreds of thousands of lives across the world and has caused economic chaos. Indeed, in the UK since March we have seen two cuts to interest rates, an emergency budget, the national debt being higher than GDP and the econ- omy contracting by a fifth in April – a monthly record. To find out how those responsible for paying our pensions on time and in full are reacting to this upheaval and uncertainty, we brought pension scheme trustees together with professional trustees to discuss how they are investing during the pandemic.
The following article is based on a conversation that took place in June.
Gerald Wellesley is a professional trustee at PSGS. He sits on the trustee boards of master trusts and DB schemes.
Neil Mason is a strategic finance manager at Surrey County Council. He is responsible for the Surrey Pension Fund, which has 100,000 members and is valued at around £4.3bn. Mason is also an independent member of the London Borough of Hounslow’s pensions board.
Pandemic performance How a scheme is positioned going into the crisis will have a big say in how it performing during it. Surrey Pension Fund was in a good position when the pandemic arrived, but this soon changed. It was fully funded, according to its March 2019 valuation, making it worth £4.5bn. However, at one point during the pandemic it fell to £3.7bn, before recov- ering to £4.3bn. “We are an open scheme with free-cashflow and no immediate concerns on our income,” says Neil Mason, head of pensions at Surrey County Council. “We suffered significant losses to the portfolio, but we are still delivering on our long-term invest- ment strategy and meeting our funding targets.” Some schemes, meanwhile, suffered a double whammy from the pandemic, says Andrew Stevens, an investment specialist for British Airways’ (BA) final salary schemes. “The volatility was punishing for equity holders and risk assets,” he adds. “Combined with gilt yields falling, so liabilities increased, it was not great for defined benefit schemes, depending on strategy.”
Andrew Stephens is an investment specialist for British Airways’ defined benefit schemes: The Airways Pension Scheme and The New Airways Pension Scheme.
BA has two final salary schemes, which have reacted differently to the crisis. The Airways Pension Scheme is the more mature of the two. It is cash-flow negative and closed to new members. The scheme is advanced in its de-risking journey being 90% hedged on lon- gevity and has protection against rates and inflation. “That is close to its endgame and there was not much of a material impact from the volatility, around a 1% reduction in funding due to its hedging,” Stevens says. “That is one story.” The other story centres on the New Airways Pension Scheme, which is less mature. It closed to accrual in 2018 and has a dif- ferent strategy. Around 45% of its assets are return seeking and its liabilities are not hedged. “Falling gilt yields were only partially offset by our hedging,”
22 | portfolio institutional August 2020 | issue 95
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