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 in October 2017 and culminated in a revised investment objective and asset allocation. The review was informed by the improved funding position identified by the 2016 valuation, together with advice from the investment advisor and scheme actuary on future investment and demographic expectations. The new investment objective has been effective since 1 April 2018 and a transition plan is underway which aims to implement all remaining asset allocation changes by the end of 2020. The revised strategy has reduced the proportion of the Fund invested in equities from over two-thirds to just over one-third and is reweighting the Fund towards fixed income going forward, as NILGOSC seeks to reduce investment risk as the Fund slowly matures. The reweighting of the Fund also led to a review of NILGOSC’s overall investment objective, which from 1 April 2018 was changed from CPI+5% to CPI+3.5%.
The first phase of the transition successfully completed in March 2018, with £827.8m transferred from active UK equity mandates to fund an increase in passive index linked gilts managed by Legal & General. This included termination of the BlackRock Global Equity mandate in February 2018. The second phase of the transition took place during 2018/19, with 3 further active mandates terminated and 2 mandates reduced in order to fund the 4 new specialist Fixed Income investment managers with £2.2bn in March 2019. The 4 new mandates were funded on 22 March 2019 and performance management commenced on 1 April 2019. The 4 new mandates are Royal London Asset Management (RLAM) Absolute Return Government Bond Portfolio, T. Rowe Price Dynamic Global Bond Fund, BlueBay Total Return Diversified Credit and PIMCO Multi Asset Credit Mandate. The third phase of the transition was the appointment of a new investment manager, CBRE GIP, in February 2020 to manage a c.£250m Global Property mandate. This mandate was not funded at 31 March 2020 and will be gradually funded over 12-18 months as suitable opportunities arise. The final phase of the transition will be the appointment of a specialised Emerging Market Equity manager to manage a mandate of c. £200m. This appointment will take place before the end of 2020. This appointment combined with further investment in infrastructure will reduce equity holdings to c.34% of the total fund.
The standard targets and benchmark indices for each asset class held by the fund as at 31 March 2020 are shown in the following table:
|Asset Class||Type||Target/Benchmark Indices|
(Outperformance shown per annum)
|Equities||UK||FTSE All Share + 2%|
|Equities||Overseas||MSCI All Countries World + 3%|
FTSE All World Index + 3%
FTSE All World North America Index
FTSE North America GBP Hedged
FTSE All World Developed Europe ex UK Index
FTSE All World Developed Europe ex UK Index hedged
FTSE Japan Sterling hedged
FTSE All World Developed Asia Pacific ex Japan
FTSE All World All Emerging
|Cash||All||Cash LIBID 7-Day|
|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%|
3 month GBP LIBOR + 3%
|Bonds||Multi Asset Credit||Merrill Lynch British Pound LIBOR 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||Index Linked Property||MSCI UK Quarterly Property Index + 1%|
|Property||Global Property*||Absolute Return of 5-7%|
|Property||Private Rented Sector||7% Absolute Return|
|Infrastructure||All||CPI + 3%|
* This mandate was implemented in February 2020 but was not funded before 31 March 2020.
**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.