While many European corporate pension plans are moving into bonds and alternatives to reduce volatility in their funding levels, BP PLC's £12.7 billion ($21.1 billion) pension fund is sticking with its 75% equity allocation.
That's because the strength of BP's business — and its covenant with the pension fund — allow for such a lofty equity allocation, said Sally Bridgeland, CEO of BP Pension Trustees Ltd., London, which oversees the fund.
“You can't just look at pension funding in isolation. You have to look” at the company's ability to support the fund, Ms. Bridgeland said in a recent interview. “The important thing is to be (emotionally and financially comfortable) with the amount of risk the company is willing to take.”
The trend among European defined benefit funds has been a gradual diversification from equity exposure, especially as mature — and often closed — plans lower the risk in their portfolios, sometimes shifting to liability-driven investments.
In its annual look at aggregate asset allocations among more than 1,000 European pension funds, Mercer found the average equity allocation among U.K. funds fell to 54% as of Dec. 31 from 64% five years ago. The trend away from equities held up in other European market markets, including France, Germany, Netherlands and Spain.
For BP, the covenant — defined as the employer's willingness and ability to pay pension obligations — is at the heart of all pension fund matters at the company, including investments, Ms. Bridgeland said.
BP officials and trustees coordinate the parent's business risks with its pension investment risks, making sure the two don't overlap. For example, fund trustees avoid allocations to emerging markets such as those in the Middle East and South America because the sponsoring company's finances are highly dependent on those regions.
“It's the fiduciary duty of the trustees to diversify, and what we mean is diversification from the covenant, where that's easy to do,” Ms. Bridgeland said.
The BP pension fund is on the forefront of keeping track of the company's health. This year, Ms. Bridgeland implemented a “dashboard” look at the fund's reliance on BP. Combining asset and liability data from consultants Mercer and Hewitt Associates with internal data on BP's corporate financial health, an in-house team runs quarterly “what-if” scenarios for both the fund and the company.
“Most pension funds will, at some level, look at the employer's covenant and at the employer's business risk,” said Craig Gillespie, Reigate, England-based senior investment consultant at Watson Wyatt Worldwide Inc. In the past six months or so, Watson Wyatt introduced a similar modeling tool called covenant asset-liability modeling, or CALM, which three clients are now using, Mr. Gillespie said. He declined to name them.