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Use of triggers in FTSE 100 pension funds to hasten equity exodus

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The growing use of triggers in UK pension funds will hasten the shift from equities to bonds as funding levels improve through 2014, research suggests.

According to LCP’s ‘Accounting for Pensions’ report, pension funds from the country’s largest 100 companies marginally decreased equity exposure in 2013, but several had set up automatic de-risking triggers.

The triggers automatically switch equities into bonds as the funding in pension schemes increase, leaving companies moving out of equity holdings just as the asset class’s value rises.

Two of the FTSE 100 firms using triggers – distribution firm Bunzl and packaging firm Rexam – both disclosed the use in their annual reports, contributing to the general move away from the asset class.

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“This type of mechanism,” LCP’s report said, “potentially enables schemes to de-risk without any additional contributions being required from the sponsoring employer.

“Given the relatively wide-spread use of such triggers, we can expect to see further moves out of equities in future years as and when equity markets rise and funding levels improve.”

Schemes in the index had marginally increased their exposure to equities in 2012.

However, strong returns and improved funding since will have seen movement back towards liability-matching assets.

The FTSE 100 funds currently have 33% of assets invested in equities, a slight fall from 34.5% with a shift into bonds and other assets.

“This is in the context of a period when equities significantly outperformed bonds,” LCP said. “If no rebalancing had been undertaken, the equity allocation would have increased by around 4%.”

Contributing to the fall in exposure were the BG Group schemes, which moved 23% of their £1.1bn out of equities and into bonds.

However, not all schemes followed suit, with security firm G4S shifting allocation during 2013 to have 4% in bonds (down from 22%) and 26% in equities (up from 15%).

LCP’s research also showed contributions into DB schemes from sponsoring employers decreased over the course of 2013 by £2bn to £14.8bn.

Estimates from the consultancy suggest £7.6bn of this was used to cut deficits rather than employee-based benefits.

The consultancy said the drop was partly due to fewer significant contributions taking place in 2013, and an increased use of non-cash funding and asset-backed contributions.

Thirty-eight of the 100 firms now use such methods.

Use of these arrangements, which usually see a property or assets used to underpin the scheme income on a contingent funding basis, has come under scrutiny from the Pensions Regulator.

While not outlawing the use of such methods, the body has suggested increased guidance on the matter, while the Pension Protection Fund has said it would only take into account property-backed arrangements in levy calculations.

The research also said a wholesale switch from indexing pensions against the retail prices index towards the government’s latest calculation, RPIJ, would immediately shave £20bn off scheme deficits.

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