The Nuclear Liabilities Fund — Investment Principles
The assets of the Nuclear Liabilities Fund are split into two parts. A substantial part of the assets of the fund is held in the National Loans Fund where cash can be accessed at short notice and its security is backed by the government. It is used to meet the current and shorter-term liabilities of the fund and allows the Trustees greater freedom in investing the balance of the fund, known as the growth fund.
The longer term liabilities of the fund, the costs of decommissioning, are likely to change over time in line with the costs of labour, materials and evolving technology. The Trustees estimate how much return will be needed to meet the liabilities and design an investment strategy which targets this rate of return while reducing the risk of significant falls in the value of the assets.
Returns are achieved by investing in a number of different asset types: the attendant risks of investing are reduced by diversifying the investments across different types of asset which are expected to react differently in the range of economic scenarios which may present themselves in the longer term. The growth fund has a bias in its investments towards UK assets with the dual aims of supporting the UK economy and reflecting the likely behaviour of the fund's liabilities.
As the assets in the growth fund are not needed for many years it can benefit from the illiquidity premium which normally exists in capital markets: a higher rate of return on illiquid assets like property and infrastructure available to long-term investors who do not need to sell assets at short notice. The stability of the fund’s investment strategy is also key in reducing the impact of the costs of buying and selling investments on its returns.
A source of additional expected return comes from active management of the investments, with skilled asset managers making investment decisions to gain returns which exceed market indices. The fund is large enough to require competitive fee rates from its investment managers and improve the likelihood of beating the market.
The Trustees do not make day to day investment decisions themselves. All individual investment decisions are made by appropriately regulated investment managers. The Trustees, and Aon, acting as the Trustees' agent, monitor and oversee all investment management decisions.