● Railpen manages the Railways Pension Scheme, one of the UK’s largest pension funds, with its mix of defined benefit (DB) schemes open to new members, and maturing schemes closed to new entrants. Aiming to blend the advantages of long-term real return investing with thoughtful asset-liability risk management, Railpen has a highly delegated investment risk governance structure, allowing it to respond to changing client circumstances and market opportunities.

● Its long-term investment horizons allow Railpen to take positions in less liquid asset classes by assuming carefully considered development risk. In the short term, agility and dynamism are crucial – it hires and retains the best talent, while sourcing external expertise. All this took years of internal collaboration and strategic thinking to evolve. The past 18 months brought significant changes in funding and outlook for DB pension schemes worldwide. Railpen worked closely with its trustee to navigate this shift.

● At the beginning of 2022, its schemes had low interest rate exposure. Railpen recognised the benefits of these assets to short-term asset-liability risk management when discounting liabilities using government bond yields but felt they could not meaningfully contribute to the long-term goal of paying pensions. This decision was the result of pressure from both board and clients as 2022 approached, when government bonds increased in price. But Railpen stayed true to its philosophy.

● Recognising the market environment could change quickly, it primed the board for what could be done if this happened. When government bond yields rose significantly in 2022, the fund was in an excellent position to act. Several of its teams executed an unprecedented, out-of-cycle shift in investment strategy, which meaningfully increased exposure to government bonds. Liability risk hedge levels rose from an average 10% to 80% for the closed DB schemes, while exposure to growth assets for these schemes was reduced, locking in funding gains.

● During September and October 2022, when others were forced sellers, Railpen bought UK gilts at attractive valuations -- impossible without nimble governance and the trust of its stakeholders. It was a real joint effort, including the investment strategy and research team, client investment solutions, funding (actuarial) and inhouse investment management teams. A hundred employers also had to be consulted. Decisions had to be made quickly, but teams with very different perspectives challenged each other, supporting the outcome. Thanks to this enterprise, funding gains were locked in, and many of the closed schemes have seen their journey plans reduced from an average fifteen years, to arrive at full funding on a very conservative basis.