North Yorkshire Pension seeks ILS manager for up to $230m allocation

The North Yorkshire Pension Fund, a pension scheme for council and local government workers in the Yorkshire region of the UK, is seeking an insurance-linked securities (ILS) manager for its first allocation to the asset class, which could be for as much as $230 million.

The pension fund has published a procurement notice to this effect, first reported by publication Pensions & Investments, as it seeks to enter into new alternative investment asset classes and reinsurance is set to be one of those.

The pension fund said it is “considering” introducing an ILS and reinsurance-linked mandate that could be as large as 3.3% to 5% of its total assets, which would equate to £110 million to £165 million (or $155 million to $230 million).

The North Yorkshire Pension Fund is looking to add greater diversification to its portfolio and shift away from being too focused on equities. It said that the allocation to ILS would be made using funds from its current equity allocation.

The North Yorkshire Pension Fund’s investment committee has reviewed its investment strategy recently and concluded that it needs to reduce its equity exposure, citing “recent material improvement in the Fund’s solvency level.”

It’s possible the fund had ridden a wave of equity rises in recent months and years, but now with the UK facing uncertainty over Brexit and the economy it finds this an opportune time to look for diversification and lower correlation.

“This has proven to be more turbulent as the UK conducts its Brexit negotiations and the Pension Fund Committee wishes to mitigate the risks associated with this at short notice.

“To remove some of this exposure to these risks, the Fund would like to introduce some new lower risk asset classes to its portfolio,” the fund said.

“The returns from ILS depend on the underlying risks which are very different from those of traditional assets. This facet is unique,” the pension continued to explain.

Adding, “Allocating to ILS therefore helps in building a more robust overall portfolio with a strong risk/return profile.”

The initial contract for the allocation is expected to be for as long as 10 years, with an initial 3 year term and then up to 7 one year extensions possible.

The pension fund noted that investments in ILS are typically only possible twice a year, with the next being in June 2018 and as a result it wants to have a contract in place with an ILS manager in time for the mid-year reinsurance renewals.

It’s encouraging to see this UK pension fund looking to ILS as a diversifier and to reduce financial market correlation in its portfolio, as this is precisely one of the benefits of the ILS and reinsurance-linked asset class.