UK – Mercer Investment Consulting says the average allocation of UK pension schemes has declined by four percentage points to 64%.
It said it has surveyed 360 UK pension schemes with assets of around 112 billion pounds (165 billion euros) and found that the maturing of final salary pension schemes mature has meant that the average allocation of scheme assets to equities has slowly declined.
It found that the average benchmark allocation to equities is 64% - a reduction of four percentage points since last year. Forty per cent of the equity allocation is to overseas equity markets.
On average, 34% of pension scheme assets are invested in bonds while just two percent are invested in alternative asset classes such as property, hedge funds and private equity.
“The reduction in equity allocations has taken place on the back of the equity market rally, which started in March 2003,” said Mercer partner Andy Green. “The move is partly due to increasing pension fund maturity, but also reflects trustees’ desire to manage their pension fund risk.”
He added: “The decline in equity allocations is likely to be an ongoing trend.”
The study found that only seven percent of schemes still follow a peer group benchmark strategy, which represents a further fall of 1.5 percentage points since last year.
Anticipated changes to investment strategy
The number of pension schemes that invest in alternative asset classes is expected to increase significantly in the next year.
The proportion of schemes implementing active currency mandates is predicted to rise from five percent to around 15% over the next 12 months, while interest in hedge funds is likely to increase from four percent to over 10%.
Tactical asset allocation was also anticipated to become more popular, with the proportion of schemes using TAA expected to rise from three percent to as much as 10% by next year.
“Trustees and pension fund sponsors are still seeking to generate good returns rather than simply move from equities to bonds,” said Green.
“Trustees are aware of the potential benefits to be gained from diversifying their sources of return generation by investing in alternative asset classes, and activity is growing. The fear of being the first mover is no longer there.”
Few funds have adopted a formal strategy to match all or the majority of their liabilities with investment in bonds or use swaps. However, nearly 20% of schemes are investing all new pension fund contributions into bonds.
Mercer collected data from schemes with assets in excess of 25 million pounds.