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UK: General trend into bonds

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UK - Recent years have seen a general trend within the UK pensions industry from equities into bonds, according to Joanne Segars, incoming chief executive at the National Association of Pension Funds (NAPF).

"We have seen changes to schemes' attitude to investment and investment profiles not just over the last year but over the last few years," she ways. "It is in response to several factors, not least the growing liabilities due in part to increasing longevity. But another factor has been the regulatory environment and the need to reduce risk base levels. And this need to reduce the riskiness of pension funds and scheme specific funds require a closer matching of assets and liabilities."

And while last year's equity upturn saw a reduction in deficits, the risks to schemes that are now so obvious on company balance sheets will continue the trend, she adds.
But fixed income had a difficult time last year, notes Chris Parrott, pensions manager at the Comet pension scheme.

"It has not performed that well to be honest but it's a difficult environment; we understand it's difficult and attempt to adapt to it. But the way we've set the fund up is not to expect the investment strategy to perform absolutely brilliantly in all markets at the same time. An important principle for us is protecting the downside so that we can get some stability as far as funding is concerned for the employer."

Some 30% of Comet's assets are in a gilts and bonds portfolio. "The active global bond allocation accounts for a further 10% and the absolute return fund's target is 5%," Parrott says. "We recognise that equity had a really booming year last year and fixed income didn't in comparison but over the lifetime of an economic cycle all things should contribute positively."

And indeed, last year's story was the robust equity performance. "We saw a 27% increase in the scheme's assets to £198m [€294m] comprising £18m of new contributions and nearly £30m from investment performance," says Parrott. "The driver was mainly the equity markets, but also real estate. We have 30% in passive equity funds, split evenly between the UK and overseas, and we have a 10% target allocation in unconstrained global equities.

"The target allocation for real estate is 15% but we are about 1% underweight because we make our property investment through UBS' Triton fund which is now closed to new money. We are currently considering whether to leave it as is, with the additional 1% spread more or less evenly throughout the rest of the portfolio, or to investigate other options.
"We recognised that having such a diversified allocation would probably be best achieved by investing in a series of pooled funds. And that is the case with everything we've got. We don't actually have a segregated fund anywhere, we just buy units in specific funds."

UK top 10 pension funds by assets (€m):

1. British Telecommunications……………..42543.7
2. Universities Superannuation Scheme…38570.8
3. Scottish Public Pensions Agency……….27363.4
4. Coal Pension Trustees……………………..27343.0
5. Electricity Pensions Services……………..26677.9
6. Royal Mail Pensions Trustees…………….22229.0
7. Railways Pensions Trustee Co……………21438.9
8. Royal Bank of Scotland……………………..20231.5
9. National Grid…………………………………18997.3
10. British Airways…………………………..….17466.0

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