UK - More than 20% of the smallest firms offering defined benefit  (DB) schemes plan to decrease their allocation to UK equities over the next year, research from the Association of Consulting Actuaries (ACA) has revealed.

The final report of its 2008 Smaller Firms Pension Survey highlighted changes in DB investment strategies, with almost 75% of the 394 schemes surveyed reporting an increase in the proportion of bonds and decrease in equities as part of their forward strategy.

Figures from the ACA survey showed the current split of assets is 33% in UK equities, 23% in overseas equities, 10% in fixed interest gilts, 9% in both index-linked gilts and corporate bonds with the remainder of the assets spread across other assets including property, private equity, hedge funds, commodities, infrastructure and tactical asset allocation (TAA) strategies.

That said, the findings showed 23% of respondents expect to decrease the allocation to UK equities in the next year, compared to just 7% planning to reduce overseas equities, while the largest expected increases are targeted at gilts and corporate bonds, although 8% expect to increase the cash/deposit allocation and 5% each plan to increase investments in infrastructure, commodities and TAA.

Despite this suggested move towards alternative asset classes, the survey showed that 93% of DB schemes offered by smaller firms have four or less investment managers, and while only 22% of these are passive managers, on average they control 47% of the overall assets in a scheme.

Meanwhile research into the investment strategies of defined contribution (DC) schemes revealed that overall 72% of small schemes offered a default strategy, and although this rose to 85% in schemes with 151-250 employees, it dropped to 64% among the smallest schemes with 50 members or less.

In addition, while a lifestyle fund is used by 78% of all DC schemes, and is employed by all of the largest schemes surveyed by ACA, even fewer of the very smallest schemes have introduced a lifestyle fund.

The latest findings follow an initial report by ACA in September in which it revealed 55% of small firms offering existing schemes did not believe they would meet the personal accounts exemption test, while more than 60% believed the pension reforms scheduled fro 2012 will lead to an increase in scheme closures. (See earlier IPE article: Reforms to close two-thirds of small firm pensions)

Keith Barton, chairman of ACA, said: "Much confidence has been lost in savings vehicles over the last few months and years and the expected higher taxes at the end of this recession, bodes ill for employers and employees finding more financial room to make higher pension contributions."

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