Public market investments

With government bonds, interest is paid on a fixed schedule, which can be indexed to inflation to protect investors from fluctuations in consumer prices (index-linked bonds). These investments provide more predictable but potentially lower returns than equity investments. We typically invest in predominately UK government bonds as well as those in other developed markets.

We invest in government bonds as part of our liability matching strategy in the Retirement Income Builder. These liability matching assets hedge (or match) our liabilities (our members’ pensions) against moves in interest rates and inflation. This is so the income stream we get matches the liabilities we’ll need to pay in the future.

In the Investment Builder, the Do It For Me Options invest in government bonds for members approaching retirement due to the more predictable (but potentially lower) returns.

Credit investments include several asset classes with different characteristics. They usually pay a return on a fixed schedule, however they are slightly riskier with potentially higher returns than government bonds. Below are a few different types of credit asset that we invest in.

• Corporate bonds are an important part of our asset allocation, sitting between equities and government bonds on the spectrum of risk. They are typically issued by companies who need to raise capital to fund their business or project needs, without selling an equity stake in the company.
• Emerging market government bonds are issued by developing countries, these have a higher risk than bonds issued by developed countries given the potential for greater economic and political volatility.
• Asset backed securities are collateralised securities that are backed by an asset (such as mortgages), which are pooled together and split into tranches with different risks. These typically pay a floating coupon that varies with market interest rates.