The Bank of England Pension Fund has appointed three new managers as it prepares to take more risk for potentially higher returns. The BBC Pension Fund is another scheme that has awarded a mandate to a new manager after a long time of sticking with incumbents. 

 

 

The pension scheme of the Bank of England hired Insight Investment and JPMorgan Asset Management for liquid investment grade credit briefs each worth nearly £450m in early August last year, and Aviva Investors a month later.  

 

While the first two mandates were implemented in late August and early September 2021, the implementation of Aviva’s “global secure income” mandate only started in late January 2022. It will be funded through a series of drawdowns over time, with the illiquid mandate, currently worth £26m, expected to take until November 2023 to be fully invested. The new managers join Legal & General Investment Management, which for the previous 15 years was the sole external manager of the scheme’s £5.1bn in assets. 

 

The three new hires were brought in after the trustees decided to include higher risk assets in the portfolio, with a focus on environmental, social and governance factors.  

   

    

Before the addition, the pension scheme saw its funding level increase to 104% in the 2020 valuation, up from 101%. It is not clear why the trustees felt they had to increase the return potential of the investments, previously consisting only of gilts, bonds and cash, but the government’s planned reform of the retail prices index might have been a decisive factor.  

 

In 2020 the fund held about 60% of its assets in index-linked gilts and another 31% in corporate index-linked bonds. As such, it will be heavily impacted by the UK Statistics Authority’s decision to align RPI with the lower consumer price index including owner occupiers’ housing costs from 2030, and by the Treasury’s decision not to compensate holders of index-linked bonds. An application for a judicial review of UKSA’s RPI decision, brought by the pension schemes of BT, Ford and M&S, failed earlier this year. 

 

   

    

 

The BBC Pension Scheme is another fund that recently committed to a new manager. During the year to March 2022, the scheme has "made a commitment to a private credit fund managed by 17Capital, the Scheme’s first new manager appointment in several years”, it said in its recent annual report. 

 

The £19.8bn fund has also made investments through existing managers, including buying assets for its ‘alternative matching asset’ portfolio, such as infrastructure and renewable energy investments. It argued that such assets offer the prospects of stable long-term cash flows.  

 

“These are not expected to be as effective a short-term hedge for the scheme’s liabilities as UK government bonds but should deliver higher returns and cash flows that are well aligned to the scheme’s obligations over the longer term,” it noted.  

 

Improvements in the funding position over recent years have allowed the scheme to de-risk its portfolio. In the second half of 2020 and early 2021 – when equity markets were rising – it sold down its equity exposure from 18% to stand at about 11% this year, and in late 2020 transacted a £3bn longevity swap with Zurich and Canada Life Reinsurance covering part of the pensioner liabilities.  

 

At its last full valuation in April 2019, the fund had a deficit of £1.14bn, which it hoped would be plugged by 31 December 2028, while an update as at 1 April 2021 found a shortfall of £494m on a technical provisions basis. The 2022 valuation is currently underway. 

 

 

The scheme is likely to hit the headlines next year, depending on a court verdict over pension changes and staff’s reaction amid public sector unrest.  

 

The BBC said on 11 May this year that it is reviewing its future pension provision, making an application to the High Court to decide the correct interpretation of one of the scheme’s rules and clarify a number of options - ranging from the way benefits are built up and funded to a more drastic closure to future accrual. Employers currently contribute 42.3% of pensionable salaries to the scheme, which was closed to new entrants in 2010. The scheme’s sponsor could be facing severe funding cuts as the new culture secretary, Michelle Donelan, has reportedly said that a review of the licence fee would begin within weeks. 

 

What form any changes could take has not been communicated in detail. “To date, the BBC has not informed the trustee of any specific proposals to change scheme benefits or member contributions for active members,” the trustees recently told members. Out of a total membership of about 46,000, more than 7,000 were still contributing in March. 

 

The trustees will be a party to the proceedings, but only to help the court collect relevant information. Two of the trustees have stepped down since the announcement was made. Member-nominated trustee David Gallagher reportedly resigned on the date of the announcement in protest at the employer’s decision. Glyn Isherwood, an employer-nominated trustee, resigned at the end of May, but it is not clear if his resignation is to do with the BBC’s pension decision.  

 

The court hearing is expected to take place in the first half of May 2023, with a judgment following some months later.