Strengthening Our investment Escalation Message from Key highlights our stewardship Our progress Our purpose approach and Our approach and exercising Our aspirations for 18 Pension Protection Fund Responsible Investment Report 2022/23 our Chair of the year commitment at a glance and governance incorporating ESG to engagement shareholder rights the coming year Appendices Our investment approach and incorporating ESG Our investment objectives Growth portfolio – This primarily focuses on protecting our As well as investing in public market assets, we take Split of asset allocation3 claims reserves and conservatively building up additional advantage of the long-term nature of the fund by The PPF portfolio is currently managed to achieve two reserves for future claims. A secondary objective is to fund accessing illiquidity premia through private markets. 4% long-term objectives: the purchase of physical assets in the Matching portfolio. We take a considered approach when implementing 6% Equity • Grow assets at cash + 1.5 per cent annualised over the The Growth portfolio contains Listed Equity, Emerging exposures to asset classes, some of which are non- Global Credit long term. Market Debt (EMD), Investment Grade (IG) Credit, Absolute traditional, to ensure that we optimise our risk budget. 3% 5% Return, Private Equity, Real Estate, Alternative Credit, EMD • Allocate a risk budget to assets in our investment Infrastructure, and Timberland & Farmland. Geographically, nearly two-thirds of the portfolio is 37% 2% Absolute Return universe as e昀케ciently as possible, while ensuring that invested in UK assets, which is largely driven by our 6% the interest rate and in昀氀ation risks within our liabilities We will continue to use a well-managed, conservative LDI internally-managed UK LDI and Credit assets as well as 6% Cash are fully hedged through our LDI strategy. strategy to ensure that interest rate and in昀氀ation risks within our externally-managed UK Real Estate and Infrastructure Alt Credit our liabilities are fully hedged. allocations. The next largest regional allocations are to 3% 5% The Board sets a risk budget for the Investment team, North America and Europe ex-UK. 6% Private Equity which drives the process for determining our Strategic Changes to Strategic Asset Allocation (SAA) 17% Infrastructure Asset Allocation (SAA). The non-LDI (growth) part of our Our SAA asset allocation was also revised this year to Measuring our performance portfolio is a diversi昀椀ed portfolio of public and private assets re昀氀ect additional risk considerations and minimise the We measure the performance of our investment portfolio Property with allocations that are optimised against our agreed risk risk of reserves eroding over the medium term. Main SAA over 昀椀ve-year rolling periods which we consider to Farmland & Timber budget. This approach is taken to ensure that we can pay changes were: be an appropriate investment time horizon to deliver UK Credit cash昀氀ows to our members as they fall due. the cash昀氀ows required for our members. This long- • An increase in Short Dated Corporate Bonds, UK Credit, term perspective also aligns well with our stewardship Gilts Restructuring our investment approach Private Equity and Infrastructure. expectations, as we recognise that engagements with Following the publication of our funding strategy review • A decrease in Listed Equity, EMD, Absolute Return and companies and other issuers can take a number of years Split of geographical breakdown in September 2022, and the shift in market dynamics, Government Bonds. to bear fruit. we completed a detailed review of our SAA. Our new 1%1% funding framework, which went live on 1 April 2023 The ESG & Sustainability team continues to work with all Considering the needs of bene昀椀ciaries in our 4% (just after the period we are reporting on), separates the asset classes to ensure our stewardship approach is fully stewardship process and activities United Kingdom funding requirements for current members from those integrated into all portfolios. As mentioned, we have built our responsible investment of future claims. In response to this, we’ve established a and stewardship processes to safeguard sustainable returns Europe ex UK new investment framework. This splits our investment 10% 1% 2% North America How the fund is managed in the long term, in line with the long-term nature of our 1% portfolio into two in order to align with the separate funding liabilities and our investment horizon. We also consider 2 Asia Paci昀椀c requirements and deliver the required returns: We manage just over half of our assets (UK LDI hedging other stakeholders such as our levy payers when striving to strategies, hybrid assets and strategic cash) in-house generate these returns in a sustainable manner, and consult 15% Asia Emerging Matching portfolio – The objective of this portfolio is to through a team of portfolio managers. The remainder is with our levy payers on an ongoing basis regarding our 65% Middle East & Africa be a fully-funded annuity portfolio for current members. managed by external fund managers across a range of funding strategy as discussed on page 16. It can use a limited amount of leverage to manage interest vehicles, including segregated accounts, pooled funds, Latin America rate and in昀氀ation risk, but this is expected to diminish over closed-end funds, co-investments and passive instruments. Europe Emerging time. The Matching portfolio contains Government Bonds, 1 Other Derivatives, Cash and HAIL (UK Credit) assets. 1 HAIL: HAIL/Hybrid assets – Investments which possess attributes of both liability hedging and growth assets. 2 Investments that possess attributes of both liability hedging and growth assets. 3 The newly created Matching portfolio will consist of the Gilts portfolio and part of the UK Credit portfolio.