The £2bn (€2.5bn) United Utilities Pension Scheme has allocated 7.5% to private debt after its triennial valuation revealed an improved probability of reaching full funding by 2020.

The pension fund of the FTSE 100 water supplier is to allocate £150m to pooled debt funds which invest in a mixture of private, real estate, infrastructure and corporate debt. It had as much as 60% in equities in 2011 before trimming back in a bid to reduce investment risk.

The scheme now holds 80% in fixed income and long-dated liability-matching assets, which it told IPE in January, would be further diversified to include real estate and infrastructure.

“We see infrastructure and real estate debt as a better option to holding real assets”

Steven Robson

Despite looking at direct allocations, it has chosen a pooled fund arrangement that allocates to real estate and infrastructure debt, alongside private loans.

Steven Robson, head of pensions at United Utilities, told IPE the £150m allocation to the debt vehicle was funded by cutting exposure to synthetic equities, corporate bonds and other alternatives.

“We see infrastructure and real estate debt as a better option to holding real assets because the debt fund is backed by collateral and felt it was better than the actual asset classes,” Robson said.

“It’s the ‘looking for slightly better returns for a similar level of risk’ argument.

“We haven’t gone to try to shoot the lights out, but a more certain return and aiming to capture the illiquidity premium.”

In January, Robson said the fund had historically struggled with infrastructure investments, because United Utilities understood the sector due to the nature of its water supplying business, and internal analysis never showed attractive investments.

“We know infrastructure quite well,” he said. “So when the internal analysts at the company do the sums, we sometimes don’t see the value in projects.”

“The risk-adjusted returns come back at a lower value than we would expect compared with what United Utilities undertakes internally.”

At the time, he also ruled the fund out of investing in the Pensions Infrastructure Platform (PIP), the flagship investment pool set up by the National Association of Pension Funds (NAPF) and the Pension Protection Fund (PPF).

A month later, IPE revealed three of the founding ten pension funds in the PIP abandoned the PIP citing cost and return issues.