Interview | Chetan Ghosh
“Our assets now stand at £9.5bn whereas the sponsor’s market cap is around £4bn.”
Chetan Ghosh, chief investment officer of Centrica Pension Schemes, sits down with Mona Dohle to discuss managing risk, controlling assets that are double the sponsor's market cap and why cash is king.
Centrica has a relatively young defined benefit (DB) pension fund, which has quite a few active members. Does that give you more freedom in where you allocate your money because you will not need to raise significant amounts of cash immediately? Yes, that’s right. The historical background behind that is when Centrica spun-out of the British Gas Scheme it only took the active members with it, so in effect it is a 22-year-old scheme.
That is a somewhat unusual, but comforta- ble position to be in compared to the aver- age DB scheme.
It is certainly unusual, but we are maturing quite quickly. If we did not have deficit con- tributions coming in, we would still be cash-flow negative.
Can you tell us a bit more about the struc- ture of your investment team? We are a team of seven and based in Wind-
sor. A big part of our ideology is to focus on asset allocation rather than manager alpha. A lot of teams our size split tasks by asset class so that they have fixed income or property specialists. That kind of structure is all about trying to find manager alpha. We don’t do that. We have an asset alloca- tion specialist, someone who looks after illiquid investments, a specialist for private investments and a financial controller. We are trying to structure the team in a way that is the most productive.
Since joining the scheme 10-years ago you have gradually reduced its equity exposure and introduced a focus on liability match- ing, which was followed by a cash-flow matching strategy. Are you planning to continue on that trajectory and to what degree are you hedged against interest and inflation risks? We are reworking a lot of our considera- tions at the moment due to two important dynamics. Firstly, we finished our actuarial
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valuation which defines the amount of def- icit funding we might need. That in turn changes the level of risk we will be taking. The other important dynamic is that there has been a material change in the strength of the sponsor. If we look at the size of the pension scheme versus the market cap of the sponsor, there has been a big turna- round. 10 years ago, the assets of the scheme were 20% of the size of the sponsor’s mar- ket cap; we are now more than twice the size of our sponsor. Our assets now stand at £9.5bn whereas the sponsor’s market cap is around £4bn. That is stark and a lot of it has come in the past three to four years. That creates a different dynamic when it comes to deciding the attitude to risk, and so we are undergoing an extensive consul- tation on what to do next. Historically, we had a 35% hedge on interest rate risks and 55% on inflation risks so a fair degree of risk control is already there, especially given that we are a young scheme. We now need to consider that if the deficit
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