Anyone concerned about low growth in the UK economy may wish to increase exposure to defensive stocks, namely companies which should keep making money even in tougher economic times.

One of our top defensive picks is Xafinity (XAF). The bulk of its earnings are generated by ongoing services to support defined benefit (DB) pension schemes.

It helps pension trustees to check they have enough money to pay members; it assists with annual reports, record keeping and member communication; and it makes sure the right pension cash is paid to the right people.

All these activities have to be done on a regular basis regardless of whether the UK economy is doing well or badly. Xafinity gets paid out of pension scheme assets and its fees are linked to inflation.

Misconceptions about earnings

You may have read about some people being offered generous cash sums to transfer out of a DB pension as trustees are eager to reduce their long-term liabilities. Xafinity insists its income hasn’t been significantly affected by this trend as it costs broadly the same to service 1,000 members in a DB pension scheme versus 900.

The reduction in DB pension members actually creates an opportunity for Xafinity as it has a platform called National Pension Trust (NPT) which can be used to hold the members’ assets during retirement.

It is encouraging DB trustees to promote NPT as a suitable destination for departing members who don’t have the financial expertise to manage their own money via a SIPP (self-invested personal pension).

At the same time, demand is growing for NPT as a vehicle for individuals with a defined contribution (DC) pension, better known as a workplace pension. Xafinity says employers have a duty to make sure employees are given appropriate information for how to access their pension assets once they retire.

A helping hand

More flexible pension rules mean retirees can now stay invested in the market instead of buying an annuity, but a lot of people don’t know what to do. NPT can be used as a decumulation vehicle. The infrastructure is run by Xafinity and an independent panel of trustees selects the underlying assets.

Investment bank Liberum says regulatory changes in the future should provide additional demand for Xafinity’s advisory services.

Liberum forecasts £10m pre-tax profit in 2017 and £16m next year. Net debt is forecast to be £31m this year and £22m in 2018. An estimated 6p dividend in 2018 equates to a 3.7% yield.

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