| Pension fund profile: Kingfisher bolsters defences with cash injection and overlay |
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| 18/02/2007 | |
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Kingfisher, the home improvement retail group, has been sprucing up its own house, injecting £60m (as part of an additional £250m funding agreed with the Trustees in 2004) into its pension scheme. As a result, the scheme's net liability (now reported on its balance sheet), will likely be lower in 2006 than the £239m deficit it reported the previous year, company officials say. The cash injection will surely help, but it's only part of a broader strategy to further cut the deficit of the £1.4bn UK scheme and protect the fund from interest rate risk. As part of that strategy, Head of Pensions, Colin Hately has commenced implementing an overlay as a hedge against the vagaries of the bond market. The fund is not new to interest rate risk. According to its most recent annual report, a drop in corporate bond rates from 5.3% to 4.7% increased its UK pension liabilities by £170m in 2005. This and other experiences in volatility have prompted Hately to turn to derivatives. "We use overlay to finesse the bond portfolios and swap away interest rate risk," he says. "If we were to wind the clock forward twenty years what we would get as a result of the overlay is an asset that backs each pension as closely as possible." Gilty as charged "We have decided that the most prudent approach is to be 100% solvent on a gilt basis in no more than twenty years and so we wouldn't take any credit for our equity holdings to reach that objective. By gilts (UK government bonds), I mean we would like to be 100% funded on the most secure basis, which is a more stringent test than on an accounting basis." With 29,000 members (20,000 of those have left work but have not yet reached retirement age), the scheme has been looking beyond the broad contours of a vision and focusing more than ever on managing its liabilities. This has spurred a number of changes in its portfolio. For one, the company is trying to reduce its reliance on equities. It has already reduced its allocation to the sector from 60% in 2003 to 56% in 2006. It is currently at 35%. The Trustees intend to cut the fund's "non-bond" exposure to 20% in the next eight years, which parallels their move to implement an overlay over the remaining 80% of the portfolio, which will be more exposed than ever to shifts in interest rates. "The objective is for the assets to move in line with the value of the liabilities," regardless of interest rate movements. These efforts have effectively reduced the fund's duration, which is a measure of a portfolio's sensitivity to shifts in interest rates. And in the last four years, the fund's fixed-income allocation has gradually increased to 55% from 30%, with the balance in property. These moves are very much in line with a broader trend that distinguishes UK corporate schemes from those on Continental Europe: while UK plans have in the aggregate cut their equity positions from relatively heavier weightings, their Continental counterparts, which have historically had much lower weightings, are increasing them. Turn down the Vol One of the drivers behind this trend is the new regulatory environment in the UK, such as mark-to-market, which aims to reduce volatility on a company's balance sheet. Following the adoption of the IFRS accounting standards, a company's balance sheet now reflects its pension liabilities. These measures have contributed to Kingfisher's decision to reduce the portfolio's duration and exposure to volatility. For example, duration is lower because of the overlay which has been in place for several years. But the regulations have also contributed to some difficulties. "The legislation is forcing us to be more short-term oriented in an area that by definition should be very long-term. The new accounting standards are driving us toward short-term measures. The challenge then has been to put into place strategies that enable us to reduce volatility where possible while allowing us sufficient time to invest in return seeking assets in order to give us the asset growth we need." Kingfisher, which is closed to new entrants, has been allocating more funds to active, specialised managers in search of these return seeking assets. Hately accordingly plans to commit more funds to active management. In 2003, nearly half of the scheme was passively managed. Today, only one-third of the equities and bonds are passively managed. "On the equities side, we are conscious that we are not leveraging the skill premium as significantly as we'd like and that's why you are seeing the percentage of equities passively managed reduced to more highly skilled products and that work is ongoing so that there will be further moves from passive to active." VB |
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Articles of the same Topic : Pension funds UK
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