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UK Pension Lifeboat Fund Reduces Equity Allocation to Combat Inflation, Increases Investment in Infrastructure and Forestry

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BNN Correspondents
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UK's Pension Protection Fund Adjusts Strategy to Address Inflation Concerns <br> Image Credit: The Guardian

The UK government-backed Pension Protection Fund (PPF), responsible for safeguarding savers in company pension plans, has taken steps to mitigate the impact of persistently high inflation. The fund, which manages £39 billion in assets and is one of the largest pension funds in the UK, has reduced its exposure to equities by one-third. Instead, it has reallocated funds to infrastructure and forestry investments. The PPF's Chief Investment Officer, Barry Kenneth, expressed concerns over inflation and the potential effects of high interest rates on the fund's assets.

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Inflation Concerns Prompt Strategic Asset Allocation

In response to the ongoing challenge of high inflation, the PPF has adjusted its investment strategy. The decision to decrease its equities target, which encompasses both global and UK holdings, from 9 percent to 6 percent, reflects the impact of inflation on equity returns, particularly growth stocks. The persistence of high inflation has prompted the PPF to explore alternative investment avenues that may offer better protection. The fund has increased its allocation to infrastructure investments from 2.5 percent to 4.5 percent and its forestry, farms, and agriculture holdings from 2 percent to 3 percent. This move aims to diversify the fund's portfolio and provide additional inflation protection.

The PPF's investments are managed independently of the government, and its asset reallocation aligns with a broader trend among defined benefit pension funds that prioritize guaranteed pension payments and inflation protection. The fund's foray into private markets mirrors similar strategies adopted by other retirement funds.

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UK Government Encourages Pension Fund Investments in UK Companies

Simultaneously, the UK government is exploring measures to encourage pension funds to increase their support for UK businesses. Potential initiatives include enhancing tax incentives for investing in domestic companies and pooling funds to generate greater investment scale. These efforts aim to stimulate economic growth by channeling more capital into UK growth areas, such as private equity and venture capital.

Moreover, the PPF is open to expanding its role in supporting struggling pension schemes even before they reach the point of failure. This proactive approach would enable the fund to intervene early and potentially prevent pension scheme failures. The government's proposal aligns with the PPF's vision and could contribute to increased investment in UK growth areas.

Preparedness for Potential Market Downturn

As pension fund managers brace themselves for a potential market downturn, the PPF anticipates potential impacts on its private equity (PE) portfolio. With approximately £2 billion of the PPF's £37 billion fund allocated to private equity in 2022, there may be valuation impacts. However, Kenneth suggests that the diverse nature of the fund's PE portfolio, which includes both private equity funds and funds of PE funds, could potentially mitigate some of the effects compared to listed equities.

EconomicGrowth assetmanagement PensionProtectionFund Savers
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