Interview – The Royal County of Berkshire Pension Fund
membership profile of the fund. It applies to virtually all defined benefit schemes. With the passage of time, we see the pro- portion of retired members compared to our active and deferred members increas- ing. With that, we have more money be- ing paid out in retirement benefits com- pared to what we have coming in from member and employer contributions.
It is often said that this puts the fund in a risky position. Do you identify with that, or do you look at it another way? It’s a great question. But I look at it in a slightly different way. When we discuss cashflow negativity, we are referring to our dealings with our members rather than our investment activities. So in our investment strategy, there is plenty of har- vestable income: we simply reinvest to compound that up.
If we suddenly went cashflow negative tomorrow, we will be able to meet those demands without selling anything. In essence, we can always start to harvest the income rather than reinvesting it, then over the long term we have the scope to amend and
shift our investment
strategy, should we need more assets with a higher income yield in the portfolio. I don’t think our glidepath to cashflow negativity puts us under any undue risk as an important part of this journey is closely monitoring the cashflow profile as our cashflow position progresses.
You mentioned your change in portfolio earlier in the year. How has the inflationary environment impacted your investments? It is a highly relevant and topical issue. To answer it we need to think about when the high inflationary environment really began, and how the portfolio has per- formed since August 2020.
Over that three-year period, the consumer price index has inflated average consumer prices by just under 20%. But our fund has returned just over 24% in that same period.
Looking at that alone, one could say we’ve 14 | portfolio institutional | October 2023 | Issue 127
schemes, where DC managers only look at one side of the funding equation.
In essence, good companies will create and hold value over the longer term.
been highly resilient in a high inflationary environment. But being resilient to infla- tion alone is not enough as DB schemes in general need to outperform inflation by about 2.5% on an annualised basis to keep up with the pace of accumulation in their liabilities. But Berkshire needs to outperform by a further 1% to counter the historic under-funding position. It’s probably worth noting that at Berk- shire we have ranked in the top three funds for performance in the whole of the local government pension scheme uni- verse [PIRC data set] during that period. If we were not in such a strange and uncertain macro environment, I’m sure you would agree that 24% asset growth over three years would have been consid- ered excellent. But like any institutional investor, I don’t think anybody has been able to keep up with inflation and liability growth over the past three years.
You must still be pleased with that type of performance. We are, but as a DB fund, we don’t just look at our assets. We look at our funding ratio assets versus liabilities. So liabilities are growing at more than 5% each year – even more when inflation is high – and our job is to match, or beat that, otherwise our funding level deterio- rates. I guess that’s the real difference between DB and defined contribution
So you’ve not had to respond too much in terms of adjusting your investments? It’s an interesting point to consider. The investment community is aware of the two lagging asset classes over the past three years: debt/credit and real estate. Debt comes as no surprise, but we gener- ally keep that in our portfolio as a diversi- fier rather than a growth asset. What’s really been a surprise to us is real estate. This asset class has historically been attractive to investors because of its supposed inflation protection characteristics.
The past three years have gone to show this asset class simply has not performed in the way that it should. We have since reduced our allocation to real estate and we are continuing to evaluate its purpose in the fund going forward.
You mentioned earlier the benefits that ESG brings to your portfolio. What is your ESG approach and how important is it to the fund? ESG underpins all of our decisions, as it does for most institutional investors. It’s generally about being future proof. You don’t want to be holding a bunch of assets today that have no buyer or value in the future. Our liability duration extends beyond 2050. So these are important and real considerations for the fund’s perfor- mance and are not just arbitrary pen and paper models. This is also a hugely com- plex and multi-faceted area.
What do you make of recent negative headlines about ESG? There’s a lot of headlines out there and a lot of them are not so friendly to the invest- ment management community in general.
Do you have a divestment policy within your ESG approach, or do you see engagement as a better way to address such issues? We have exclusions, clauses in our pooled global equities fund allocation: that’s
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44
