Shake-up in UK council pension schemes’ currency mandates

Norfolk County Council Pension Fund has become the latest local council pension scheme looking to improve management of its currency exposure, with plans for a framework to be in place in June. The pension fund manager is in the implementation phase with two of four shortlisted managers, Barenberg Bank,Pareto Partners, Record Currency Management and State Street Global Advisors, to equally manage a currency exposure of £850 million in its overseas equities portfolio.

Alexander Younger, pension fund accountant at Norfolk County Council Pension Fund in Norwich, says the managers are being selected on the basis of the full European procurement supported by London-based consultant Hymans Robertson.

"In terms of the emphasis, we were looking for people to help us manage downside risk. By that we mean drawdown risk in the portfolio, because we're moving from a very conventional passive hedging on a 60% hedge arrangement."

To date, the fund's passive hedging has been undertaken by its custodian Northern Trust. "Traditionally, we've hedged 60% of the three major currencies. One of the parts of this portfolio is to extend that across all the significant developed currency exposure in the portfolio, so our Canadian dollar exposure, some of the Scandinavian, Aussie dollar, for example," says Younger. "Our benchmark for these guys is to do better than the 60%hedge that would otherwise have been in place, but particularly to offer protection in periods of drawdown. We basically look at a combination of quarterly and monthly rebalancing to get some diversification within there as well."

Younger adds that the fund is still taking advice from Hymans Robertson on extending the mandate to its emerging markets exposures. "We are minded to keep that exposure, but it's certainly an interesting area as to whether or not we wish to make a black and white decision on that, or whether to actually use the skills of these guys in terms of managing how that exposure then manifests itself in the portfolio," he says.

Meanwhile, following an underperformance of 7% in Q3 last year, Dumfries and Galloway Council Pension was advised by Hymans Robertson to disinvest from FX Concepts on November 30, 2011. The pension scheme also employs Mellon to manage currency risk, which while underperforming by 1.4%, produced 12-month returns ahead of benchmark.