Around £15bn (€18bn) of fixed income assets make up the Pension Protection Fund’s (PPF) liability hedging strategy, which is designed to maintain the robustness of the overall balance sheet by investing in assets that behave similarly to its liabilities.

About a further £6bn is invested in fixed income assets within the PPF’s return-seeking strategy to contribute to its overall funding objective in a risk-controlled fashion, complementing its allocations to more equity-like strategies to ensure that it maximises returns.

The PPF makes use of a mixture of internal and external mandates, leveraging in-house expertise to deliver bespoke mandates that give better control of risk management where it has the scale and specialist competency in-house, while using best-in-class external managers where it does not.

The liability hedging strategy consists of a mixture of traditional LDI assets like gilts, swaps, repos and futures but also an in- house cash portfolio and what the PPF calls “hybrid” assets: investment-grade assets that behave like liabilities but generate additional risk-adjusted returns over gilts in a mix of public and private market credit.

PPF has a unique and market-leading approach to LDI hedging. It pro-actively and precisely manages complex exposure to interest rates and inflation via an in-sourced strategy. It claims that this is more akin to the way that a bank runs a trading book than how pension schemes typically operate by recalibrating the exposures on its CPI liabilities weekly and tweaking the portfolio every daily to control risk.

An enhancement that PPF made to its hybrid asset strategy in the last year is to include USD and euro-denominated bonds, overlaid with fixed cross-currency swaps to convert the bonds into a hedging asset for its liabilities. The primary purpose of this is to grant access to a broader range of issuers and diversify its credit risk away from the sectors that dominate the sterling market.