International construction firm Lend Lease’s pensions story is one that will resonate in many corporate boardrooms across the UK, explains Louise Farrand

The company’s relatively young defined benefit scheme was created in the early 1990s. The DB scheme closed to new members in the early 2000s and to existing members in 2011.

Infrastructure

Its relative youth did not make it immune to the decline in funding that so many schemes experienced during the prolonged market downturn.

Two years ago, the trustees looked at the scheme’s investments and decided the Value at Risk was too high. At the time, the scheme had a fairly typical mix of growth and matching assets.

From a trustee point of view, we want to be as prudent as we can in terms of the benefits that are being paid

“There was a decision taken that we needed to review the risks involved in the scheme. From a trustee point of view, we want to be as prudent as we can in terms of the benefits that are being paid,” explains Alan Gander, a member-nominated trustee for Lend Lease.

 The trustees kick-started their de-risking journey by deciding to introduce liability-driven investment. It took 18 months to educate the trustee board on LDI, a relatively complex investment strategy, and appoint a fund manager.

However, the time commitment was well worth it. “It has probably been the best thing we’ve done to date,” says Gander. The scheme reduced its VaR percentage from above 40% by 15%, simply by introducing LDI, says Gander, explaining: “We went into the market at a good time.”

Today, the scheme is 60% hedged against interest rates and 40% against inflation. “We would like to increase our inflation hedge but prices in the market aren’t right. We have discussed it quite recently and as part of LDI we introduced triggers, but we haven’t hit any triggers yet,” says Gander.

KEY FACTS

  • DB assets under management: £500m
  • Number of members: 2,000 (deferred & pensioner)
  • Scheme closed to new members: 2000

Alongside LDI, the scheme decided to make an investment in infrastructure. The trustees currently have 2-3% of their portfolio invested in the asset class, and have found it to be a great success. They would like to increase their exposure, says Gander, explaining that it is one of the few asset classes that is uncorrelated with equities.

“The other key part of de-risking is looking at the diversification factor. It’s not just looking at reducing risk, it’s about making sure you are well diversified with liquidity. There are a number of factors to look at to make sure it is well balanced,” Gander concludes. Next on the scheme’s agenda is further diversifying their investments in the all-important search for yield. They are considering opportunities in multi-asset credit, multi-asset debt, and the private rental sector, among others.

The endgame in the form of a de-risking transaction or self-sufficiency may be some way off for this scheme. However, protecting members’ benefits via de-risking their investments is the top priority.