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Hermes Pensions Management, which is owned by and manages the BT pension scheme, the UK’s largest, is investing £1bn of the BT fund’s £34bn of assets in commodities.

The investment, representing 3 per cent of scheme assets, is the largest single allocation to commodities by a UK pension fund and is designed to improve returns while reducing volatility.

The move comes as pressure rises on UK pension funds to find surer ways of funding their long-term promises to pensioners and to plug widening gaps between their assets and liabilities. The BT pension fund deficit was £2.1bn when last reported in 2002.

James Walsh, head of strategy and alternatives at Hermes, said: “It has become evident that schemes should not rely on bonds and equities alone to deliver consistent returns.”

Several European and US retirement funds have increased their investment in commodities. ABP, Europe’s largest pension fund, has been investing in commodities since 2001 and they now represent about 3 per cent of its €190bn (£130bn) assets.

Mr Walsh said the investment was part of a strategic allocation to diversify risk in equities rather than a bet on rising commodities prices. “Over the past 50 years commodities and equities have provided similar real returns at 5.2 per cent a year (compared to bonds at 1.5 per cent). However, the correlation of the performance especially over the longer term, has been quite different – with commodities stronger for instance in inflationary periods,” he said.

Initially, the Hermes Commodity Index Fund will be passively managed to track the Goldman Sachs Commodities Light Index.

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