Low bond yields to push UK pension funds into re-risking strategies – JPM
UK - Many UK pension funds are expecting to adopt re-risking strategies in the fourth quarter and increase equity exposure at a time when most would expect them to stick with their de-risking plans, according to JP Morgan Securities Services.
The asset manager believes a large number of UK schemes will seek to increase their allocation to equities, as bond yields remain low.
Robert Calder, executive director and EMEA technical sales specialist, said: "The de-risking approach is generally a synonym of moving toward fixed income.
"However, at the moment, many pension funds are putting this asset class on hold due to the low level of bond yields and are actually looking at another approach, which consists of re-risking.
"This is something completely new and unusual in our experience."
Michael Gardner, managing director, also stressed that pension funds were expressing increasing caution in terms of the market.
"The sovereign debt concern is pushing pension funds to sit on their bond position," he said. "The other issue is the spike in volatility, which is connected to the sovereign debt crisis.
"Most pension funds do not want to do an asset allocation shift right now, but prefer to wait until the volatility comes down.
"That way, they make sure their asset allocation will be stable over the long term and not only for a few weeks."
UK pension funds are the major buyers of transition management services in Europe, Middle East and Africa.
Calder said the reason was to be found in the outline of the UK market, where a large number of pension funds, with a large pool of savings, are based.
However, the main reason, according to him, is due to the fact UK investment consultants have driven the cost-awareness curve up with asset owners.
In addition, pension funds are requesting more transition management services solutions than in the past, which include ongoing maintenance and overlay services on an investment programme.
Calder said many of these overlays would be derivatives-based and not seek to add any alpha or performance to the fund, but help pension schemes to better manage their risk.