NILGOSC sets its long-term investment strategy by taking into account the nature and timing of the Fund’s liabilities identified through the triennial actuarial valuation and its investment aims and objectives. In setting the Fund’s investment strategy, NILGOSC first considers the lowest risk strategy that it could adopt in relation to the Scheme’s liabilities. The investment strategy is designed to achieve a higher return than the lowest risk strategy while maintaining a prudent approach to meeting the Scheme’s liabilities.
These considerations drive decisions over asset allocation. NILGOSC formally reviews the Fund’s strategic asset allocation every three years, and in determining its asset allocation, NILGOSC considers:
- A full range of asset classes.
- The risks and rewards of a range of alternative asset allocation strategies.
- The suitability of each asset class.
- The need for appropriate diversification.
The Fund’s investments are diversified across various asset classes, in order to increase the overall expected return while reducing the overall level of expected risk. A mixture of passive and active mandates is also used to capture the return required to meet the Fund’s objectives.
The last formal strategic review concluded in September 2021. The review was informed by the funding position, alongside advice from the Investment Advisor and Scheme Actuary on future capital market and demographic expectations. The focus of the 2021 review was to pause, take stock and review the existing strategy, to determine if it continued to be appropriate for the Fund. The review concluded that the strategy adopted in 2017 remained appropriate and that further action was required to bring the Fund in line with the agreed asset allocations.
As part of the 2021 review, NILGOSC, along with its Investment Advisor established that due to changes in the outlook for various asset classes, the existing target of CPI+3.5% was no longer achievable over the long-term whilst maintaining the same level of risk. To reflect the more muted outlook for investment returns going forward, the overall investment objective was lowered from CPI+3.5% to CPI+3.0%, effective from 1 January 2022.
The 2021 review maintained the same allocations to equity, property, fixed income and infrastructure, and concluded that reducing equity holdings to the strategic allocation of 34% of the Fund, whilst simultaneously increasing the Fund’s exposure to real assets should remain a key focus. The 2021 review also addressed further integrating environmental, social and governance (ESG) views into the strategy, as well as taking steps to mitigate climate risk in the Fund.
Implementation of the 2021 investment strategy was undertaken in three phases commencing in March 2022 and concluding in March 2024. In March 2022, steps were taken to reduce climate risk in the funds passive equity portfolio, with the transfer of £2.8bn of passive equity holdings to the Legal and General Investment Management (LGIM) Low Carbon Transition Fund (LCT), and an exercise was undertaken simultaneously to rebalance equity holdings to their strategic allocations. Infrastructure commitments were also increased in March 2022, with a £100m commitment to the IFM Global Infrastructure Fund (IFM GIF).
During 2022/23, the second phase was completed, which focussed on increasing the Fund’s Infrastructure commitments further towards the 7.5% target allocation. NILGOSC made significant new Infrastructure commitments during this period, with a $100m commitment to iCON Infrastructure Fund VI in May 2022, a €100m commitment to DIF VII in September 2022, and a $20m commitment to a co-investment in a renewables asset, managed by DIF Capital Partners in February 2023.
The third and final phase of the strategy implementation took place during 2023/24. Partners Group was appointed in December 2023 to manage a £285m Global Property mandate, which will be drawn down over a 3-4 year period, commencing during 2024/25. A new global equity manager with a value focus, Harris Associates, was appointed in February 2024 and funded with £525m in March 2024.
A rebalancing exercise was also completed, in two stages, as part of the last remaining step of the strategy implementation. The first stage was executed in February 2024, and its objective was to reduce the 7.7% overweight equity position as at 31 December 2023, which arose in part due to the surge in equities over the year. A decision was made in January 2024 to reduce this overweight equity position by making a temporary strategic allocation to cash of 8.5%, pending the outcome of the upcoming 2024 strategy review. Funds were transferred from passive equities into the LGIM sterling liquidity fund in February 2024, resulting in a c.8.5%/£850m allocation to cash. The second stage of the rebalancing exercise was executed simultaneously to fund the Harris equity mandate with £525m, in March 2024. This exercise rebalanced equity holdings between existing equity managers, to restore the desired balance of equity styles.
The extensive work performed during 2022/23 to build up the infrastructure allocation continued to come to fruition during 2023/24, with the new funds drawing down committed capital. This contributed to NILGOSC’s infrastructure investments increasing further towards the 7.5% target allocation. Implementation of 2021 strategy has now concluded.
The standard targets and benchmark indices for each asset class held by the fund as at 31 March 2024 are shown in the following table:
| Asset Class | Target/Benchmark Indices (Outperformance shown per annum) |
|---|---|
| Global Equities | MSCI All Countries World Index + 3% MSCI All Countries World Index +2% FTSE All World Index + 3% MSCI Emerging Markets Index + 3% Solactive L&G Low Carbon Transition Developed Markets GBP Index Solactive L&G Low Carbon Transition Developed Markets Index – GBP Hedged |
| Cash | Sterling Overnight Index Average (SONIA) |
| Fixed Income Index Linked Gilts | FTSE Actuaries UK Index-Linked Gilts Over 5 Years Index |
| Fixed Income Absolute Return Bonds | Sterling Overnight Index Average (SONIA) +2.5% 3 month Sterling Overnight Index Average (SONIA) + 3% |
| Fixed Income Multi Asset Credit | ICE BofA SONIA 1-Month Constant Maturity Index + 5% To outperform the below composite benchmark by 1.25%: 33% JP Morgan EMBI Global (GBP hedged); 33% Bloomberg Barclays Global Aggregate Credit Index ex Emerging Markets (GBP hedged); and 33% BofA Merrill Lynch BB/B Rated Developed Markets High Yield Constrained Index (GBP hedged)* |
| Property Index Linked Property | Retail Price Index (RPI) + 2% |
| Property Traditional Property | MSCI Quarterly Universe Index + 0.5% |
| Property Global Property | Absolute Return of 5-7% Net Return of 7-11% |
| Property Private Rented Sector | 6% Absolute Return |
| Infrastructure | CPI + 3.0% |
*Source ICE data indices, LLC (“ICE data”), is used with permission. ICE® is a registered trademark of ICE data or its affiliates and BOFA® is a registered trademark of Bank of America corporation licensed by Bank of America corporation and its affiliates (“BOFA”) and may not be used without BOFA’s prior written approval. ICE data, its affiliates and their respective third party suppliers disclaim any and all warranties and representations, express and/or implied, including any warranties of merchantability or fitness for a particular purpose or use, including the indices, index data and any data included in, related to, or derived therefrom. Neither ICE data, its affiliates nor their respective third party suppliers shall be subject to any damages or liability with respect to the adequacy, accuracy, timeliness or completeness of the indices or the index data or any component thereof, and the indices and index data and all components thereof are provided on an “as is” basis and your use is at your own risk. ICE data, its affiliates and their respective third party suppliers do not sponsor, endorse, or recommend NILGOSC, or any of its products or services.
**Other indices were applicable during the period under review but did not relate to the mandates in place at 31 March 2024.