Asset breakdown

Help for submitting asset breakdown on Exchange

Please note that the asset breakdown submitted here is used in the calculation of the Pension Protection Levy – it affects the roll-forward, smoothing and investment risk stressing of the section 179 asset value, which feeds into the calculation of the risk-based levy.

Asset allocations should be taken from the scheme’s most recently audited accounts. 

Allocating Assets on Exchange

Some investments do not obviously fall into any of the categories available on Exchange.  A general description of the key characteristics of each asset category has been provided so that schemes can apply judgement as to which category best reflects that investment’s risk characteristics.  This is likely to require advice from investment professionals who are, in the Trustees’ opinion, appropriately qualified, for example the Scheme’s investment advisor or asset manager. 

Multi-asset funds

For multi-asset funds, schemes are encouraged to obtain a detailed breakdown between asset classes and divide the investment amongst more than one category.  For example, this could include:

Some multi asset funds with rapidly changing asset allocations or whose constituents are not physical assets that can be classified amongst the asset classes available on Exchange may be classified most appropriately as hedge funds.  Please also refer to the hedge fund description below.  These may be referred to as “idiosyncratic” diversified growth funds (i.e. they do not rely on market related returns). 

Allocating assets where the breakdown is not reported

If the breakdown of equities and bonds into their constituent components or the breakdown of multi-asset funds is not reported in the audited accounts, then there are two options available.  Firstly, you could obtain the split at the accounting date from the scheme's investment manager(s).  Alternatively, where such a split would be disproportionately costly to obtain, you could obtain the split from the investment manager's report nearest to the accounting date.  For example, if your accounting date is 5 April and you have the split as at 31 March from your regular monitoring of investments, you should enter the split as at 31 March as a proxy for the split at 5 April.

Allocating assets where the category may vary

For some investment classes, the most appropriate Exchange category may depend on the way that the pension scheme has invested.  For example, investment in “infrastructure” is widely accessed via private equity-type vehicles and should in those circumstances be classified as “private equity” investments.  In some circumstances, however, the exposure to “infrastructure” can also be accessed through debt instruments, which means that the characteristics would be more like that of a corporate bond, so the investment should be classified accordingly. 

Similar considerations apply to structured products (e.g. a structured equity investment made up of cash, bonds and equity derivatives).  We expect that the advice of investment professionals be taken in deciding whether, given their risk characteristics, such investments can appropriately be allocated between the asset categories available on Exchange.  If not, the value should be classified as “other”.  In this situation, the scheme could consider carrying out a Bespoke Stress Calculation.  Please see the PPF’s ‘Guidance for Bespoke Stress Calculation for assessing investment risk’, which is available on the PPF website.

The classification of some investments may depend on financial market conditions, and in such cases schemes should consult their asset manager or investment advisor.  For example, it may either be appropriate to classify a portfolio of convertible bonds along with equity investments or along with non-government bond investments.  If the conversion option represents a high proportion of the overall asset value (generally when the underlying share price is high), then the convertibles are likely to be highly sensitive to the value of the underlying shares – so equity classification is likely to be most appropriate.  On the other hand, if the conversion option represents a small proportion of the overall asset value (generally when the underlying share price is low), then the convertibles are likely to behave more like debt instruments – so classification along with non-government bonds is likely to be most appropriate. 

Allocating repo arrangements

This paragraph sets out some additional guidance on the classification of gilt sale and repurchase agreements, or “gilt repos”.   It is common for gilt repos to be presented in scheme accounts in the following way:

  1. a) the value of gilts out on repo are included along with the value of any other gilts not out on repo,
  2. b) the cash obligation (for repurchase of the gilts) is disclosed as a negative value under the heading ‘repo’, and
  3. c) the cash received as part of the repo deal is included as cash (or along with other asset classes if re-invested).

Where the value in the scheme accounts is broken down in this way, element a) can be classified between the ‘Fixed interest government bonds’ and the ‘Inflation-linked bonds’ categories on Exchange, as appropriate; element b) should be classified along with ‘Cash and net current assets’; and element c) would be classified along with ‘Cash and net current assets’ (or along with other asset classes if re-invested).

Under an alternative presentation of the gilt repo value the net overall value of the gilt repos might be disclosed under the heading ‘repo’, broadly a) net of b) above.  This net overall value would be expected to be equal or close to zero initially.  If this alternative presentation is used in the scheme accounts, you may be able to obtain additional information from the scheme’s fund manager in order to breakdown the value of the arrangement in line with a), b), c) above.  If it is not possible to obtain the expanded breakdown, then the gilt repo net overall value should be classified along with ‘Cash and net current assets’.

The asset categories on Exchange are: 

Fixed interest government bonds

This category covers investments issued by a sovereign body that provide a series of known income payments at pre-determined points in time.  There is, however, a risk that some or all of these payments may not be made should the sovereign body default on its obligation.  The values of such investments are sensitive to changes in interest rates and will typically have minimal or no sensitivity to credit spreads.

For most schemes, the majority of these will be UK government bonds (i.e. “gilts”).  All overseas government bonds (e.g. US Treasury bonds, German bunds) and bonds issued by supranational organisations may also be included here.  Bonds with explicit government guarantees should be classified along with government bonds.

Include relevant components of multi asset funds and insurance funds.

Fixed interest non-government bonds

This category covers investments issued by a corporate body that provide a series of known income payments at pre-determined points in time.  There is however a risk that some or all of these payments may not be received due to the corporate body defaulting on its obligation.  The values of such investments are sensitive to changes in interest rates and credit spreads.

Include UK and overseas corporate bonds and all levels of credit rating and debt-like investments.  Investment managers may also refer to these as “credit” mandates.  Assets that fall under this category include:

Include relevant components of multi asset funds and insurance funds.

This can also include unrated investments where there is sufficient certainty in payment to be equivalent in risk and default profile to investment grade corporate bonds, such as ground rents or secure income alternatives.  Similar assets with a significant inflation linked component could be considered to be allocated to inflation-linked bonds. 

Inflation-linked bonds

This category covers investments that provide a series of inflation-linked income at pre-determined points in time.  There is a risk that some or all of these payments may not be received due to the issuer defaulting on its obligations.  The values of such investments are sensitive to changes in interest rates and inflation and will typically have minimal or no sensitivity to credit spreads.

Include UK and overseas inflation/index linked government bonds and inflation/index linked corporate bonds.  For most schemes, the majority of such bonds will be UK government bonds (i.e. “index-linked gilts”) but may also be issued by overseas governments and supranational organisations.  Schemes should also reflect holdings in inflation-linked corporate bonds in this category.

Include relevant components of multi asset funds and insurance funds.

UK quoted equities

Include all shares listed/quoted on the London Stock Exchange or AIM.  This category may also include convertible bonds where they are classified as equity-like. 

Include relevant components of multi asset funds and insurance funds.

Overseas quoted equities

Include all shares listed/quoted on any overseas stock exchange or denominated in a currency other than GB Pounds (rather than classifying between UK and overseas based on the country of domicile of the issuing body).

This category may also include convertible bonds where they are classified as equity-like. 

Include relevant components of multi asset funds and insurance funds.

Unquoted equities / private equity

Represents investment in the equity capital of an unlisted company or investment structure whereby the investor is exposed to the first loss on that capital.

Include all UK and overseas unquoted shares, private equity, venture capital and leveraged buy-outs.

Include relevant components of multi asset funds and insurance funds.

Property

Include all UK and overseas land or property (commercial, residential and industrial).  Include any land or property owned by the pension scheme that is occupied by a scheme sponsor.  Holdings in non-listed property funds (e.g. property unit trusts) should be included here.

Listed property funds (e.g. REITs) may be included here where the holding is explicitly intended to provide exposure to the property sector.  However, small concentrations of these held as part of a larger equity portfolio need not be separately identified and can be included along with the rest of the portfolio as quoted equities. 

Include relevant components of multi asset funds and insurance funds.

Insurance funds

Insurance fund investments may include pooled funds, deposit administration contracts, with-profits contracts and similar.  For such investments, schemes are encouraged to obtain a detailed breakdown between asset categories as at (or near to) the relevant scheme accounts date.  Each component should be included within the relevant categories.  In the few instances where this breakdown is not available, the amount should be included in the “other“ category. 

Deferred or immediate fully insured annuities

Insured annuities are contracts through which payments in respect of a portion of the scheme’s liabilities are met by a third party insurance company.  Typically such contracts will be written in the name of the pension scheme trustees.  These annuities generally relate to a particular group of named members and/or dependants of the scheme.

Include the proportion of total assets invested in annuities where the audited accounts reflect a value for these assets. 

If annuity assets (and matching liabilities) are excluded from the scheme accounts then the asset breakdown in the Scheme Return should not include these assets either.  Where the scheme’s Section 179 Valuation submission shows that the asset value includes annuity policies excluded from the relevant accounts, the Bespoke Stress Calculation submitted by the scheme will be adjusted by the PPF to include an allowance for the annuity assets in the submitted stressed and unstressed asset values, unless the accounts underlying the Section 179 Valuation have an accounting date before 31 December 2015 and the accounting date corresponding to the most recently available scheme accounts is on or after 31 December 2015.    Details of this calculation are set out in section 4.7 of the Transformation Appendix to the PPF Levy Determination.  The Determination can be found on the PPF website at: 

https://www.ppf.co.uk/are-you-levy-payer

Hedge funds

A hedge fund may invest in a diverse range of assets and may employ a variety of investment strategies to maintain a hedged portfolio intended to protect investors from downturns in the market while maximizing returns on market upswings.  Generally hedge fund strategies would aim to limit volatility relative to equities and tend to have a cash based performance benchmark, e.g. LIBOR+x per cent.  A typical feature of hedge funds will be their ability to use derivatives, long/short positions and leverage to gain significant long/short exposure to certain markets or opportunities.

This is a particularly difficult area of investment to define, given the variety of asset classes and strategies that are used in practice.  General descriptions of the types of strategies that might be considered include:

Where currency explicitly forms part of a pension scheme’s investment strategy, this is typically done through a leveraged vehicle, so such funds should be included with hedge funds.  Examples of fund types to include here are: FX carry and emerging market currency funds.

Commodities

Commodities are goods that are generally used as primary goods in the manufacturing of other products.  Examples include oil, metals and agricultural goods.

Pension schemes will typically not have direct exposure to commodities but will access the returns on them via commodity indices.  Timber and forestry products can be considered as commodities.  Funds that are designed to provide long-only exposure to commodity markets should be classified as commodities.

Cash and net current assets

Cash investments have high liquidity and very short maturities (usually 90 days or less).  Include cash in any currency or denomination, cash held in savings accounts, bank accounts, money market funds, negotiable certificates of deposit (CDs), commercial paper, Floating Rate Notes, etc.  Note that active currency strategies should be included with hedge funds.  Include net current assets. 

The market value of any derivative exposures (e.g. interest rate swaps, equity futures, longevity swaps, rights, warrants, repo arrangements) should be included in this category.  Schemes that have such instruments could consider carrying out a Bespoke Stress Calculation.  Please see the PPF’s ‘Guidance for Bespoke Stress Calculation for assessing investment risk’, which is available on the PPF website.

Some further guidance on how to classify repo arrangements is provided above.

Where derivatives are used by asset managers for efficient management of their portfolios, and therefore form only an implicit part of the investments, they should be classified in line with the rest of the portfolio.

Asset Backed Contributions (ABCs)

An asset-backed contribution arrangement (“ABC”) is a contractual arrangement between trustees and one or more entities within the sponsoring employer’s group. ABCs involve regular payments to the scheme for the duration of the arrangement, often being indirectly funded by the sponsoring employer. Such payments are underpinned by an asset.

For general information about ABCs, please refer to the Regulator’s guidance: https://www.thepensionsregulator.gov.uk/en/document-library/regulatory-guidance/asset-backed-contributions

Please note that the PPF collects additional information about ABC arrangements itself to feed into the levy calculation – more details can be found on the PPF website: https://www.ppf.co.uk/are-you-levy-payer

Please note that the ABC information required for PPF levy calculation purposes will need to be captured and submitted using a form available from the PPF. Without completion of the PPF form, the PPF may take some information from Exchange and/or may make conservative assumptions. This would mean that schemes may not gain appropriate credit for the ABC (or the coupons paid from it) in their levy calculation and the deduction the PPF makes from the scheme assets to calculate the levy may not be fully accurate. 

Other

Some assets do not obviously fall into any of the above categories.  A general description of the key characteristics of each asset category has been provided so that in such circumstances, the trustees, in conjunction with their investment advisor or asset manager (unless the trustees have sufficient expertise) can apply judgement as to which category best reflects that asset’s risk characteristics – this may involve dividing the asset amongst more than one category.

If assets cannot be assigned in this way, they should be recorded in this category.