Scottish Homes PF strategy

The Fund's actuary estimated that the funding level of the Scottish Homes Pension Fund was 104.7% at 31 March 2017. Achievement of full funding meant that the Fund no longer needed to take investment risk by investing in equities and property. Instead, the Fund was able to minimise risk by investing solely in bonds, specifically UK gilts. These financial instruments move proportionately with liability values. 

After a year of significant change, the year to 31 March 2019 brought no change to the strategy allocation of 100% bonds and this should not change until at least the results of the next actuarial valuation (March 2020) are known. At that point in time, the actuary will amend financial and demographic estimates based on actual experience over the prior three years.   

The strategic and actual asset allocations for the Fund at the end of the 2018 and 2019 financial years are shown in the table below.
Asset allocation
  Strategic Allocation
  31 March 2018 31 March 2019
  % % % %
Equities - - - -
Bonds 100 91.9 100 97.8
Property - 2.7 - -
Cash - 5.4 - 2.2
Total 100 100 100 100

Shortly after the end of March 2018, the final sale of property assets was completed, leaving the Fund entirely invested in index‐linked gilts and cash. The index linked gilts were structured to broadly match the expected liability payments as they fall due. Given that the Fund had achieved full funding, the Pensions Committee approved a new investment objective in June 2018: "to match the cash flow from gilt income and redemption payments as closely as possible with the expected liability payments of the fund" 

Detailed analysis of the Scottish Homes liabilities was undertaken during 2018/19 to ensure that the invested assets are as closely matched with the liability profile as possible, taking into consideration the expected duration of liabilities and whether they are fixed or index‐linked in nature. 

This resulted in a portion of index‐linked gilts being sold and reinvested in nominal gilts to achieve a closer asset‐liability match.  At 31 March 2019, the Fund is 'cash flow matched' up to one year beyond the next actuarial valuation expected at 31 March 2020, and 'duration matched' liabilities beyond that.  This is because there is greater certainty in the earlier period ‐ funding levels will continue to be subject to the actuary's financial or demographic assumptions of future experience, which will be reassessed during 2020/21.

Investment movements

As the Scottish Homes Pension Fund is mature, it must sell assets to pay pensions.  Cash or cash equivalents are held to enable pensions to be paid in between the dates when gilts redeem. The Fund's assets have increased in value by 4.6% over the year, adjusted for cash flow movements to pay pensions, while a proxy for the value of liabilities increased by 4.4%, which suggests that the asset‐liability match is quite effective.