NAPF debate: bonds’ role in UK pension funds

UK – Market participants are unconvinced that bonds should be the dominant asset class of UK pension funds – according to a vote following a debate on the issue at the NAPF conference.

At the debate, pension consultants Watson Wyatt nominally argued the case for equities while rival Mercer Human Resource Consulting put the case for bonds.

But it appears that market participants have already made up their minds. Seventy-seven percent of an audience of more than 400 disagreed with the proposal, which at the end of the session had only fallen to 75%.

There is an ongoing argument that bonds match liabilities and that equities do not - this is holding up the argument to invest predominantly in bonds, with asset-liability matching now seen as imperative. “Matching assets and liabilities is the right thing to do, and traditional ideas have been superseded by modern thinking,” said Mercer’s Jon Exley. “Equities do not match liabilities theoretically, empirically or practically.”

Stating the case for equities as the dominant asset class, Nick Horsfall of Watson Wyatt pointed out: “There is still risk with bonds.” Although he pointed out, “if you are going to mismatch liabilities, then there is no reason not to use property, hedge funds etc.” The choice does not have to be between bonds and equities. Horsfall prefers to think of the two categories being “bonds and return-seeking investments”.

But the feeling is that the switch to bonds should have occurred three years ago. Equities should eventually outperform, and switching to bonds now could mean locking in a deficit. The view of many is that reacting to the current market conditions would not be in line with pension funds’ long-term investment views.

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