SAUL combined growth with de-risking

High returns on a portfolio already 48% de-risked into bonds and other liability-driven investments

SAUL’s success provides a challenge to the view that the main problem with USS’s approach is their plan to de-risk out of growth assets and into bonds over the next twenty years. Here is SAUL’s current pension fund portfolio:

LDI = liability-driven investment (in gilts that ‘match’ the DB liabilities). CDF = cashflow driven financing, which relies primarily on corporate bonds and other credit held to redemption, with the discount rate set as the yield on this credit. The following provides a more fine-grained representation of the current portfolio:

SAUL’s portfolio is more de-risked than USS’s current portfolio, although it is not as de-risked as the one into which USS plans to de-risk over the next 20 years.

SAUL plans to engage in further de-risking of the above portfolio. But, unlike USS, it will not do so in a rigid Test 1-driven fashion, even if this worsens poor scheme funding. Rather, they will engage in further de-risking only when their funding level has improved:

The Investment Committee aims to gradually increase the allocation to bond and bond-like assets and/or risk-hedging instruments over time as the Scheme’s funding position allows in order to achieve the risk objectives within the PRRMF [Pension Return and Risk Management Framework]. Triggers to increase risk-hedging and the bond/bond-like portion of assets may be set up as dictated by improvements in SAUL’s funding level. An overlay is used to provide additional interest rate and inflation hedging over that provided by the physical assets.

It appears that SAUL can afford to fund DB out of a de-risked portfolio without high contributions because the scheme is now in good financial health — i.e., in surplus, with assets greater than liabilities.

Moreover, as I note in this blog post, SAUL appears to be in such good health, relative to USS, because they have invested their assets much more successfully than USS has. In 2016–17, for example, SAUL managed both to grow their assets at a much higher rate than USS did and to hedge interest rates and inflation in a manner that matched increases in the value of the liabilities much better than USS did.

These graphs show that SAUL has consistently achieved higher investment returns than USS over the same 1, 3, 5, and 10 year periods leading up to the 31 March 2017 valuation. Here are SAUL’s returns:

Here are USS’s consistently lower returns for the same periods (dark purple bars on left):

In addition to facing the very same hostile DB regulatory environment as USS, SAUL has, of course, operated within the same challenging investment climate as USS. SAUL shows that it is possible to do things much better than USS has managed in these circumstances.