The UK pensions landscape has changed significantly in the past few years, as defined contribution schemes have grown and defined benefit schemes closed to new members, with sentiment toward ILS also shifting.
The Railways Pension Scheme (Railpen) has kept up its ILS allocation, which stood at £1,181mn ($1,505mn) as of 31 December 2023, according to its most recent disclosure. This put ILS at 3.4% of total assets of £34.7bn.
Kunaal Vora, head of external manager oversight at Railpen, said the scheme’s current take on ILS was positive owing to rate conditions in the market recently.
“Like the broader market, we considered rate in the ILS market to be attractive on a historic basis and have ramped up our exposure to ILS between 2020 and 2024,” he said.
“Over the next 12 months or so, we are comfortable with our allocations. The factors that would influence our decisions would include risk-adjusted return assessments within the ILS market, as well as any flows, or investments that may compete for capital,” Vora said.
Shropshire County Pension Fund’s allocation to Securis stood at £40mn ($51mn) as of 31 March 2024, and produced a return of 14.6% for the year, according to the scheme’s annual report.
The allocation amounted to 1.59% of total assets of £2,503mn.
The report noted that holdings will remain across its target return fund strategy (absolute return bonds, hedge funds and ILS) until capital is required to meet commitments. These holdings will continue to reside with individual managers, after a proposal by Local Government Pension Scheme (LGPS) Central to create a target return fund product was withdrawn.
The scheme paid £451k ($570k) in costs on its ILS investment during the year, including £287k of management fees and £164k in transaction and other costs.
Its annual report pegged the long-term forecast for ILS returns at 7.7%.
Meanwhile, several other UK pension fund’s allocations to ILS are winding down.
NatWest Pension Group’s ILS allocation is in run-off, standing at £528mn ($673mn) as of 31 December, 2023.
The pension scheme’s overall assets declined proportionally faster, bringing the ILS allocation to 1.5% of total assets of £34.9bn.
North Yorkshire Pension Fund’s (NYFP)’s allocation to Leadenhall has mostly wound down, standing at £6mn ($8mn) as of 31 March, 2024.
UK pensions sector changes
The overall patchy approach to ILS within the UK pensions world partly reflects changes in the sector that have impacted on investment decision-making.
One market commentator explained: “For UK pension funds, the number one reason they don’t need to invest in alternatives is because they’re overfunded.”
This reflects the shift from defined benefit schemes to defined contribution pensions, with the former now largely closed to new members and having stable liabilities, which results in less pressure to target higher-yield investments like ILS.
Meanwhile defined contribution schemes, into which employees of UK companies are automatically enrolled, have grown to an aggregate £205bn ($257bn) in assets as of year-end 2024, according to The Pensions Regulator.
This includes £165bn in 33 master trusts.
The defined contribution schemes are generally advised by large consultancies and are characterised by a laser focus on fees, a source noted. This has led to allocations into low-fee commoditised product like cat bond funds, but less so to private ILS.
Meanwhile, with many pension investors viewing ILS as a substitute for fixed income, and fixed income now paying ~4%, the attractiveness of ILS is lower.
The phenomenon of “career risk” also continues to be cited by commentators, as the returns experience of 2017-2020 lingers on in investors’ minds.
Eurekahedge ILS Advisers Index posted its worst year on record in 2017 (-5.60%), owing to Hurricanes Harvey, Irma and Maria, and its second worse year in 2018 (-3.92%), due to Hurricane Michael.
“A lot of people have been burned by insurance and bringing up ILS is seen as a career risk, even if returns are understood to have been very strong typically,” a source said.