Pension Fund Annual Review

Investment update and interview with Mark Hedges

The Fund’s investments are there to meet the cost of providing benefits for all the Fund’s members. This means that the performance of our investments is really important, and a responsibility we take very seriously.

The Fund's returns versus benchmark over one year and three years to 31 March 2020:

Actual %

Benchmark %

Over the year to 31 March 2020, the Fund’s investment returns were 0.2% higher than the benchmark. The main reason for this was the significant performance of the private markets portfolio which has been the primary driver of returns for a number of years, reflecting the benefits of a diversified investment strategy. Core matching asset performance matched the benchmark. Public equities and credit both underperformed the benchmark over the year.

Both the Nationwide and the Cheshire & Derbyshire Sections are well funded. As a result, the majority of the Fund’s assets are invested in matching assets, which are expected to broadly track the changes in the value of the Fund’s liabilities (the cost of paying members’ pensions - both those already in payment and those still to commence). Both Sections also have smaller allocations to return-seeking assets designed to further improve the funding position to a point where the Fund doesn’t need to rely on the financial support of the Society. The investment strategy also allows for a small proportion of the overall assets to be held as cash. We hold cash primarily to ensure monies can be made available to pay members’ pensions and other Fund expenses.

The Trustee will continue to monitor the Fund’s investment performance and make any appropriate changes to the Fund’s investment objectives and strategy, in conjunction with the Fund’s Investment Consultants and the Investment Team.

To allow a degree of flexibility the strategy sets a percentage range for each asset class as opposed to a fixed percentage. The chart below shows the current percentage ranges (for both the Nationwide and Cheshire & Derbyshire Sections) in respect of matching assets, return-seeking assets and cash.

For a closer look at our investments, click here.

Interview with Mark Hedges

Mark Hedges, Chief Investment Officer, sheds some light on how he and his team support the Trustee and the Fund.

Mark Hedges

Mark Hedges, Chief Investment Officer

Mark, can you sum up the role of the Investment Team in relation to the Fund?

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As a summary our role is to ensure the Fund has sufficient assets, now and in the future, to pay members’ benefits, whilst at the same time managing the financial risks faced by any pension scheme. We are also looking to get to a place where the Fund has ‘low dependency’, by which I mean it does not need to rely on financial support from the Society.  

Can you explain what you mean by financial risks?

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There are three key financial risks that the Fund faces. These are interest rate risk, inflationary risk and longevity risk. Over the past few years we have taken steps to mitigate the first two. Longevity risk, which is the likelihood for members to live longer and therefore receive their pensions for longer, is something we are now focused on with the Trustee.

Can you explain how you are mitigating these risks?

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One mechanism we adopt is asset and liability matching. This means we pick certain investments that are likely to move in value similarly to the liabilities, which in this case are the cost of providing members’ pensions. If we look specifically at inflation risk, each year members’ pensions increase broadly in line with inflation. So holding assets which are likely to also increase in value with inflation or preferably increase at a rate which is slightly higher than inflation.

What sort of assets does the Fund hold?

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We have a diverse portfolio including around 70 different funds managed by around 50 managers. As a team we therefore spend a lot of time working with these managers to understand how these funds are performing. We also have around 5% of the Fund’s total assets invested directly in property (both commercial and residential) and therefore we also perform the role of the landlord for these properties.

How involved are you in managing the properties?

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We have specialist firms involved to undertake the day-to-day management, however ultimately we are the landlord and therefore we can be called on directly by our tenants to help resolve issues that cannot be resolved by the management firms we employ. With over 6,000 residential properties as well as the commercial properties this is a bigger job than you might think.

You may have seen on the Fund website our ‘ethical landlord’ policy. This is something we take very seriously. The COVID-19 situation has caused financial issues for some of our retail tenants. Therefore, we have been working with them to ensure that their businesses have every chance to survive the crisis. Our view is that it is better to have a financially strong tenant in the medium to long-term, even if this means reaching agreement over an adjusted rental income in the short term.

How else has COVID-19 impacted the Fund’s investments?

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As with all investments, at the start of the pandemic we saw a reduction in the value of the Fund’s assets, however I am pleased to say that most of our investments appear to have recovered, or are returning, to their pre-pandemic values.

As a team we have needed to spend more time during this period meeting (virtually of course) with the various managers so we can keep a closer eye on how they are performing. One area we have had to put even more focus on is our illiquid assets – for example infrastructure or private equity investments. By their very nature these are harder to place a value on, therefore we have needed to dig deeper into how these managers are invested to ascertain their value and performance.

What other responsibilities does the team have?

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One critical responsibility is cashflow management. Each month the Employee Pensions administration team needs to pay members’ pensions and other expenses. Therefore, we need to ensure that there is sufficient cash within the Fund’s investment portfolio to meet this monthly requirement of around £8 million.

We also support the Trustee around selecting new investments. We undertake the research required to ascertain whether a specific investment is appropriate for the Fund’s need as well as ensuring it meet’s the Trustee’s policy around ethical and sustainable investment. In fact, recently we were researching a fund which was shortlisted for recommendation to the Trustee. Unfortunately, two of the sixty investments this fund held were related to firearms, one being a sporting goods retailer and the other an online auction website. Whilst both were entirely legitimate US businesses, we could not recommend this fund to the Trustee.

The Trustee also undertook the triennial Valuation this year. We provided important support during this process as we manage the relationship with the Society.

What else will the team be focused on in the coming months?

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We will be looking at the third of the financial risks I mentioned at the start, longevity risk, working with the Trustee to consider options to mitigate this risk. We also have a lot of work to do around the reporting for the Task Force on Climate-related Financial Disclosures which will be required from 2022.