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Hermes, the asset manager of the BT pension scheme, is proposing a radical investment switch that could dramatically reduce the exposure of the UK’s largest pension fund to the UK stock market in favour of overseas stocks and alternatives such as commodities and hedge funds.
Mark Anson, in his first interview as chief executive of Hermes and primary adviser to the BT pension scheme, owner of Hermes, said he had proposed a new asset allocation for the BT retirement scheme, which has about £34bn ($63bn) in assets.
The switch would be part of a programme to help reduce the risk that BT’s pension scheme could not meet its promises to employees and pensioners.
The move comes amid increased scrutiny of the scheme’s deficit, last valued by the company at about £2.5bn, and proposals from the UK pensions regulator that companies should pay off their accounting deficits within 10 years.
Last week, BT delayed publishing a new valuation of the pension deficit after a dispute over its claims that a large part of its pension liabilities were government-backed if BT were ever to become insolvent.
As evidence of an unusual level of collaboration between a company sponsor, the pension fund trustees and the scheme adviser, Mr Anson said Hermes and BT had formed a joint working party to examine the issues surrounding the pension fund.
Mr Anson would not give details of the proposed asset allocation plan. But he is known to be a keen supporter of using alternatives to mainstream equities to enhance returns and reduce risk.
As the chief investment officer of the California Public Employees’ Retirement Scheme, the US’ largest retirement scheme, he initiated the hedge fund programme, built up the corporate governance programme, doubled assets under management in private equity as well as Calpers’ investment in property. He also initiated Calpers’ programme to invest in commodities, the bulk of which will take place later this year.
Mr Anson said investing in commodities “helps to hedge inflation that might erode the bond portfolio. Many commodities are the basic components of inflation indices.”
Hermes, which has a record of being at the cutting edge of pension fund investing, has already invested about 7 per cent of BT’s portfolio in alternatives including private equity and hedge funds. In January, it also invested about 3 per cent of scheme assets to a new commodities fund – the largest single allocation to commodities by a UK pension fund.