UK – United Utilities, the FTSE 100 water supplier, will look to diversify its pension fund’s liability-matching asset classes, as valuations show the scheme is on track for full funding after timely hedging.
The company, born out of the merger of the former public-sector Northwest England water and electricity boards, sponsors the United Utilities Pension Scheme.
The £2bn (€2.4bn) defined benefit (DB) plan allocated 80% of its assets to liability-matching classes in 2013, focusing on UK government bonds, cash and corporate bonds.
However, head of pensions Steven Robson said the latest triennial valuation, to be finalised in the coming weeks, showed the scheme was on course to exceed the funding target set in 2009.
Robson said the positive outlook, underpinned by timely interest rate hedging in 2010, had led the scheme to look at diversifying its liability-matching portfolio.
While increasing its corporate bond allocations given the impact of narrowing credit spreads, Robson said the scheme was also looking at private debt, real estate and infrastructure.
He added that serious work was being undertaken for the scheme to enter the private debt market soon.
However, while Robson said the fund would consider infrastructure investments, historically, it has struggled with the risk-adjusted returns on offer in the UK market.
“With the nature of United Utilities, 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.”
Robson said the lower market returns were understandable in light of required third-party assistance, due to schemes’ lack of management expertise in infrastructure and scale.
He also said the fund had avoided entering the Pension Protection Fund (PPF) and National Association of Pension Funds’ (NAPF) flagship infrastructure project, the Pensions Infrastructure Platform (PIP).
The PIP, beset by delays, is still in the process of selecting managers despite suggestions it would be ready in 2013.
This, the returns and Robson’s concerns over his scheme’s lack of scale led to the ruling out of PIP investment.
“We are only a £2bn fund, so we can’t afford to commit hundreds of millions towards a single asset class or project,” Robson said.
“We are still not sure what the [PIP] investments are going be, nor how it will fit with our de-risking plans.”
