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RBS Group pension fund increases ILS and reinsurance allocation


The Royal Bank of Scotland (RBS) Group pension fund has demonstrated its appreciation of reinsurance and insurance-linked securities as an alternative asset class by increasing its allocation to ILS fund managers by 36% during the pension funds last financial year.

Just over a year ago we wrote that the RBS Group pension fund had discovered reinsurance and ILS as it moved investment capital from equities into alternatives in search of a source of stable and attractive returns with low-correlation to broader financial markets.

At that time, the financial year ending 31st March 2012, the pension fund had allocated £388m into two specialist ILS fund managers, which we now know to have been £200m allocated to Leadenhall Capital Partners and £188m to Nephila Capital.

Now, in its latest annual report for the financial year ending 31st March 2013 the RBS Group pension fund has revealed an increase in its allocation to reinsurance and ILS as part of a further move from equities into alternative asset classes.

The pension fund reduced its equity investments by £500m over the course of the financial year, as it continued to diversify into alternative asset classes in search of a more balanced portfolio. This is a strategy being followed, or investigated, by many major global pension funds at this time.

The pension fund increased its allocation to alternative asset classes by £600m during the financial year, growing its alternative asset portfolio to £1.2 billion by the end of the year.

The allocation to reinsurance has increased in market value by 36%, from the £388m at the end of March 2012 to £527m by the end of March 2013. The RBS Group pension fund has stuck with the two ILS managers it first allocated to, growing the market value of its allocation to Leadenhall Capital to £260m and the market value of its allocation to Nephila Capital to £267m.

Investments in ILS and reinsurance now make up almost 42% of the RBS Group pension funds allocation to alternative asset fund managers, which clearly shows that the bank appreciates the contribution the asset class makes to its overall portfolio. The pension fund has over £25 billion of net assets under management which makes the allocation to reinsurance around 2%, a typical amount for a major pension fund to allocate to the space.

The fact that large pension fund owners like RBS Group increase their allocations to reinsurance and ILS year to year is encouraging as it shows that they are appreciating the contribution the asset class makes to their portfolio return profile as well as a growing level of comfort in the sector and its managers.

It would not be surprising to see RBS increase its allocation again to the asset class in this financial year if the opportunity presents itself as the returns achieved to date in 2013 must be proving very attractive to the pension fund.

Read more on the RBS Group pension funds allocations to alternatives over at Financial News.

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