Financial News: BT Pension Scheme Beats Targets

28th Jun 2010 18:32

By Mark Cobley Of FINANCIAL NEWS The BT Pension Scheme, the UK's biggest savings fund, has made a dent in its multi-billion-pound deficit after making 12.2% on its money last year, thanks to timely bets on credit and the positive performance of its short-term strategies. The better-than-expected return beat an 11.6% rise in the scheme's benchmark portfolio, a bespoke, customised benchmark against which a pension scheme's actuaries measure its investment performance. In its annual report, published Monday, the BT scheme's trustees described the actual performance as "satisfactory." The scheme made a net gain of GBP2.7 billion during 2009, which took the value of its asset portfolio to GBP34.1 billion as of Dec. 31. As a result of the growth in assets, the scheme was able to reduce its deficit from GBP9 billion to an estimated GBP7.6 billion by the end of 2009, according to the report. This implies that the total bill for pensions owed also rose--partly due to people living longer--from GBP40.3 billion to GBP41.7 billion. A spokesman for BT Group PLC (BT) declined to comment Monday, saying neither the company nor the trustees had anything further to add beyond what was published in the report. Most of the scheme's gains came from recovering equities markets, although the BT trustees further reduced their equities holdings through the year, from 35% to a record low of 29%. Rod Kent, chairman of the scheme's trustees, wrote in the report: "The reduction of the proportion of our investments held in equities over recent years has been both part of a deliberate policy to diversify our return seeking investments and also a continuing policy to increase our matching investments as the Pension Scheme and its members become more mature." "Matching assets" refers to that portion of BT's portfolio that is invested in securities such as bonds and cash, with the purpose of matching its liabilities. They are distinct from "return-seeking assets", such as equities or hedge funds, that the fund hopes to make a profit on. But the trustees also created a special return-seeking portfolio of credit investments in 2008 to take advantage of rock-bottom prices during the market dislocation of the financial crisis. The scheme invested GBP624 million in this portfolio in 2008, and another GBP108 million last year, and thanks to rising prices the portfolio was worth GBP977 million by the end of 2009. Overall scheme performance was driven by both external and internal fund managers. M&G, the UK fund manager which runs money in corporate bonds for BT, beat its target by 2.5 percentage points, while an inflation-linked bonds portfolio, run by the scheme's in-house asset manager Hermes, overshot by 10.4 percentage points. Hermes also did well in European large-cap equities, but its small-cap portfolios underperformed. The BT Pension Scheme made few changes to the strategic deployment of its money during 2009, but it does have a "tactical overlay" strategy, which involves taking short-term bets on markets without affecting the long-term allocation. Such overlays, increasingly popular among the larger pension funds in the UK, are usually implemented using derivatives, rather than by buying and selling securities. BT's overlays were successful last year, adding GBP172 million of gains for the fund. The UK's Pension Protection Fund, a government-run scheme that pays out pensions to workers whose companies go bankrupt, today said it was adopting a similar approach. It has appointed six fund managers to run tactical asset-allocation strategies, including hedge funds Winton Capital Management and Cantab Capital Partners. The BT scheme also increased its investments in hedge funds by close to GBP820 million during last year. This allocation was worth GBP2.3 billion by the end of the year, or 6.3% of its total portfolio, making it one of the larger hedge-fund investors among UK pension schemes. Its long-term allocation targets remain at 33% for equities, 20% for fixed interest,15% for inflation linked intruments, 20% for alternatives and 12% for property. Web site: www.efinancialnews.com (END) Dow Jones Newswires June 28, 2010 13:32 ET (17:32 GMT)