Ian Scott is the Pension Protection Fund’s head of investment strategy.
Covid-19 brought the world to a standstill. The financial markets were swept up in the storm and the global economic shock has been the biggest since the 2008 financial crisis. During such challenging times, at the Pension Protection Fund (PPF) we continue to operate our long term low-risk investment strategy to ensure that we can continue to protect the financial futures of our current and future members.
First and foremost, our hedging approach, matching 100% of our on-balance sheet inflation and interest rate liabilities, has served us well. Our liability-driven investment (LDI) strategy has meant our portfolio has outperformed the majority of other pension funds in an environment of sharply lower interest rates and declining asset prices.
This has helped us to maintain positive funding levels throughout the crisis, reassuring our current and future members that we remain well placed to pay them their promised pension benefits for as long as they need. Secondly, we went into this crisis having already made defensive investment decisions.
This included the way we structured our overall asset allocation but also the approach taken within some of our key portfolios such as equities and UK credit. Of course, our portfolio was not immune to the shock. Even with such a defensive stance we still suffered, especially in areas where the withdrawal of liquidity by other investors had an outsized impact on asset prices, such as in some hedge fund strategies and emerging markets.
This is where the PPF’s long-term approach and strong funding position really counts. Not only were we able to hold on to these investments when others were forced to sell, but in some cases we added to them. As liquidity returned and asset prices recovered these portfolios have more than recovered all of the lost performance. Since March, we have moved to add risk back into the portfolio, but in such a way as to leave the portfolio adaptable to react to changes in markets.
We have maintained a high degree of liquidity in the fund which not only allowed us to access cash under some stressful market conditions back in March, but also gives us flexibility going forward. Although markets have recovered rapidly, there are still many challenges ahead. Government finances and corporate balance sheets are much more stretched than they were before the crisis, yet the impact has not been evenly spread, raising risks for investors.
As has been the case historically, major global crises have accelerated underlying changes in the way we live our lives, something that will also impact the fortunes of the sectors and companies in which we invest. So far, we have seen a low level of claims from the pension schemes we protect and therefore our reserves have not been significantly impacted.
We remain in strong financial health with £6.1bn in our reserves as reported in our annual report and accounts in 2018/19. But when the true impact of the crisis is revealed we cannot rule out the potential for a rise in claims. We continue to monitor this closely and we are well equipped to cope with future challenges that lie ahead. The PPF remains in a strong financial position with a diverse investment strategy that continues to perform well. We are far from complacent as the risks to the outlook are many and uncertainties abound, but we do feel that our long term, flexible, low-risk approach is the right one.
