by
Elizabeth Moran | Jul 11, 2013
British Airways (BA) pension schemes are defined benefit and based on the contributor’s final average salary. That means BA takes on the investment risk and must ensure its pension scheme has the funds needed to provide for employees at known future dates. These sorts of schemes were once prevalent in Australia but are less popular now and it’s the contributors that take on the investment risk without any certainty of lump sum amount or pension in retirement.
In contrast the BA scheme provides a known outcome on retirement and any shortfall needs to be made up by the company. Payments to retirees are reviewed annually and are linked to the Consumer Price Index. Thus BA primarily invests in inflation linked bonds to help match their known future expenses. Interestingly their investment report splits investment between “return seeking” and “liability matching” (see Table 1).
Total bond and cash allocation at year end 31 March 2012 (new report is not out yet) was 76.8%, down slightly from 77.0% for YE11. UK index linked investments were more than half the total portfolio, at 52.6%, while more volatile equities were only 11.7% of the portfolio.
Dr Stephen Nash, who writes regularly for The WIRE has been advocating:
- Higher allocations to bonds of up to 75%
- Portfolio allocation based on “liability matching”
The British Airways pension fund allocation provides a fine case in point.
So, if you’re a SMSF investor and need certainty in retirement, why not take a cue from the professionals and think about a higher allocation to bonds. Perhaps it’s time to reassess the way you think about your investments and classify them as “return seeking” and “liability matching”.
