The £2 billion (€2.5 billion; $3.3 billion) United Utilities Pension Scheme has agreed an allocation of 7.5 percent to private debt.
The pension fund of the UK’s largest listed water company is to allocate £150 million (€189.1 million; $248.2 million) to a pooled debt fund which invests in real estate, infrastructure and corporate debt, as first reported by Investments & Pensions Europe.
The news emerged after a triennial valuation revealed that the pension fund will reach full funding by 2020 on the back of improved profitability.
Steven Robson, head of pensions at United Utilities, said that it had looked at real estate and infrastructure assets but chose a pooled fund instead. The allocation was funded by cutting exposure to synthetic equities, corporate bonds and other alternatives.
“We see infrastructure and real estate debt as a better option to holding real assets because the debt fund is backed by collateral and felt it was better than the actual asset classes,” Robson told IPE.
The defined benefit fund had around 60 percent invested in equities as at 2011, but now holds 80 percent in fixed income and long-dated liability-matching assets. After its 2010 valuation, it agreed an arrangement with its sponsors in which it increased its exposure to inflation risk in return for company contributions to fluctuate based on real inflation levels. This in turn reduced the fund’s projected liabilities and allowed it to take advantage of lower required investment returns, IPE reported.
“We haven’t gone to try and shoot the lights out, but a more certain return and aiming to capture the illiquidity premium,” Robson said.