Investment strategy

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 reviews the Fund’s asset allocation every three years. In determining its asset allocation, NILGOSC considers:

  •  A full range of asset classes
  •  The risks and rewards of a range of 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 returns while reducing the overall level of risk.  A mixture of passive and active mandates are also used to capture the returns required to meet the Fund’s objectives.

The latest formal strategic review took place during the quarter ended 30 September 2021 and culminated in a revised investment objective and target asset allocation. The review was informed by the funding position identified by the 2019 valuation, together with current advice from the investment advisor and scheme actuary on the current funding position and future investment and demographic expectations. The new strategy is a continuation of the implementation of the previous strategy adopted in 2017 rather than a change in direction. In the 2017 review, the Committee undertook a comprehensive review of its investment strategy and it set a new investment target and made a revised asset allocation designed to achieve that target. The purpose of the 2021 review was not to re-perform a comprehensive exercise but to pause to ensure that the revised strategy is on the right track, as NILGOSC is a long-term investor and makes long-term strategic decisions rather than short-term tactical decisions.

As part of the 2021 review, NILGOSC, along with its Advisors concluded that the existing target of CPI+3.5% was no longer achievable over the long-term whilst maintaining the same level of risk due to changes in the outlook for the various asset classes. NILGOSC’s overall investment objective was, therefore, lowered from CPI+3.5% to CPI+3.0%, effective from 1 January 2022. The revised strategy also includes some changes to target asset allocation. The revised target asset allocation is detailed in the Statement of Investment Principles which was revised in November 2021 to reflect the changes.

Implementation of this strategy has begun, with the majority (excluding the infrastructure allocation) expected to be achieved by the end of 2023. The first phase of the transition will be completed in 2022 and will include the appointment of a further Global Equity Manager, rebalancing exercises, and a number of commitments to further infrastructure funds in order to gradually build towards the 7.5% target allocation for this asset class.

The standard targets and benchmark indices for each asset class held by the fund as at 1 February 2022 are shown in the following table:

Asset Class Target/Benchmark Indices
(Outperformance shown per annum)
Global EquitiesMSCI All Countries World Index + 3%
FTSE All World Index + 3%
Solactive L&G Low Carbon Transition Developed Markets GBP Index
CashSterling Overnight Index Average (SONIA)
Bonds
Index Linked Gilts
FTSE Actuaries UK Index-Linked Gilts Over 5 Years Index
Bonds
Absolute Return Bonds
Sterling Overnight Index Average (SONIA) +2.5%
Sterling Overnight Index Average (SONIA) + 3%
Bonds
Multi Asset Credit
ICE BofA SONIA 1-Month Constant Maturity Index + 5%
To outperform the below composite benchmark by 2.5%:
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
RPI + 3%
Property
Traditional Property
MSCI UK Quarterly Property Index + 0.5%
Property
Global Property
Absolute Return of 5-7%
Property
Private Rented Sector
6% Absolute Return
InfrastructureCPI + 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.