Agenda item

Funding, Flight-Path and Risk Management Framework

To update Committee Members on the funding position, and the implementation of the Flight path and risk management framework.



The Committee noted and considered the contents of the report and the increase in the level of hedging and the various actions taken.


Mr Page noted the following key points:

-          The funding position as at 30 September 2022 had fallen to 102%, from 105% at 31 March 2022. Since then, there had been an increase in funding level which was good news for the Fund despite the volatility in the markets in Q3 2022.

-          The risk management framework had been put through its paces, particularly during September and October 2022 but nevertheless, the framework had served the Fund well. The report highlighted the performance of each different strand of the risk management framework.

-       Equities fell but were protected by the synthetic equity portfolio and so the protection on that portion of the portfolio added value over the quarter.

-       Sterling weakened significantly over the quarter, and losses were made on the FX hedging strategy. However, due to the 100% hedge, the FX losses made had been offset by gains made on the physical assets that are invested in overseas.

-       The LDI strategy was the main focus given the recent gilt market volatility. The level of interest rate hedging had been increased within the market trigger framework from approximately 20% to 50%. The inflation hedging remained at 40% at 30 September 2022, providing valuable protection from rising inflation over the year.

-       There was extreme market volatility in gilts to a point where it was almost dysfunctional and the chart on page 282 demonstrated the tracking throughout September and October 2022 and how fast moving this period was. Despite the volatility, this had been managed well by the robust collateral framework in place.

-       After the mini-budget was announced, there had been a rapid rise in gilt yields and rapid fall in the value of gilts. In the space of a few days, gilt yields fluctuated, increasing by 2.5% and then decreasing by 2.5%, which was unprecedented. The Bank of England then stepped in and stabilised the market for a 2 week period and gilt yields fell back down but then started to steadily increase. During the two week period, the pension scheme industry sold a large amount of assets to de-leverage the LDI portfolios. However, there were still concerns regarding gilt yields spiking again but due to the support by the Bank of England and the new Chancellor who rolled back the policies, the market was stabilised.

-       Mr Page was pleased with the Fund’s very strong governance framework, with the Fund not only in a position to withstand this type of market volatility, but to also take opportunities. The Fund had a framework in place where it would take the opportunity to invest in gilts as they became cheap, with those yield levels being pre-defined. Furthermore, the officers had already completed a review of the yield levels in September and these yield levels were increased. This meant that the Fund bought gilts at cheaper levels, which was a benefit. Over the course of September, the exposure to interest rates had been increased from 20% to 50% of assets, and then the framework had been paused to take stock given the volatility, which again was a positive move.

-       However, like most pension funds, due to the value of the collateral within the flightpath strategy, action was taken quickly to bolster this to support the framework. There was £200 million in terms of physical equities sold for cash and moved over into the risk management framework to increase the collateral position. The reduction in the £200 million exposure was then replicated using equity derivatives to ensure the strategic allocation to equities remained the same and therefore, the expected return on the Fund was unaffected. This move improved the collateral position without impacting the Fund’s overall strategic asset allocation.

The Funding and Risk Management Group were continuing discussions around further opportunities the Fund could take.



The Committee noted and considered the contents of the report and the increase in the level of hedging and the various actions taken.

Supporting documents: