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Case Studies

Large UK pension fund

Key Issues

One of our clients asked Watson Wyatt's European Investment team to advise them on asset allocation for their large, mature, UK pension fund. The goal was to increase the security of their members’ benefits, and reduce the likelihood of large employer contributions in the future.
This was especially important given that the fund was many times larger than the market capitalisation of the sponsoring employer.

Approach

Our consulting advice would need to reduce risk for the company, and the plan members. At the same time, it was important to consider the implications of reducing risk (and therefore expected returns) on the fund’s funding position. The company and the trustees wanted to avoid ‘locking in’ a deficit.
We worked with the company on a solution and decided to move the fund out of equities and into bonds. This was done on favorable terms and we continue to monitor and exploit opportunities to enhance the financial efficiency of the arrangements. For example, we may use currency hedging, high-yield, emerging market debt and specially issued corporate bonds. Other possible investments are also regularly discussed.

Results

The fund's bond portfolio has since been refined into a cashflow matching portfolio to further reduce risk for the company and its pension plan members. The company and trustees continue to work with Watson Wyatt to consider innovative investment strategies to enhance investment efficiency. Our client estimates that by acting on our advice, they have added more than £1 billion of value to their pension fund.