With stock weightings still heavy last year, Britain’s pension funds look more reluctant than ever to part with equities. So where is the much-talked-of shift to bonds?

Baby boomers are approaching re-tirement and, as pension funds ma-ture, experts say funds will need the non-cyclical, regular income of fixed-rate securities to meet their obligations. Funds leaning too heavily on equities could find themselves in trouble when the stock market underperforms or even falls - or so the reasoning goes.

But last year UK pension funds held 54.1% of their assets in British equities, up from 53.6% in 1995, according to projections based on nine months of data from the WM Company, which measures the investment performance of more than three quarters of the UK pension fund market. When overseas stocks are included, the total falls from 76.3%to 75.6%.

George Urquhart, investment consultant at WM, agrees there has been a lot of talk about funds moving away from equities. But in actual practice, I don’t think it’s happening. If you look over the last 10 years, at the end of 1986 the weighting in UK equities was 51%. It went up to a peak of 58% at the end of 1992 and has come back to 54% in the last few years.”

But others find evidence of a long-term trend away from equities in last year’s investment behaviour. Funds sold shares and increased their cash holdings, though this was masked by the rallying stock market.

The average pension fund held 7.5% of its assets in cash at the end of 1996, up from 5.3% a year ago, according to Nigel O’Sullivan, investment partner at pensions investment actuary firm Bacon & Woodrow. Given the boom in share prices, the fact that equity weightings hardly changed shows fund managers were cutting stock holdings quite substantially, he says.

“The Pensions Act has been focusing many trustee minds on the need to ensure investment strategy is consistent with their liability profile, including the maturity profile,” he says. The introduction of the Pensions Act, ma-turing pension plans and the conservatism of fund managers will all lead pension funds to tilt the emphasis to-wards fixed-rate securities at the ex-pense of shares. In relative terms this change will be swift, though funds move extremely slowly, O’Sullivan says. The rate of change could be about 1% a year over a prolonged period.

Urquhart, however, sees little evidence of a change in asset allocation. “There are very few funds which have shifted their asset mix to take account of the maturity profile,” he says.

According to a maturity analysis of pensions funds carried out by WM last year, only five of 52 “super mature” funds had radically altered their asset mix to reflect their maturity profile. The other 47 had asset mixes very similar to “immature” and “mature” funds, with high exposure (mostly over 70%) to real assets - stocks and property - as opposed to fixed-interest assets.

Soaring returns in the stock market seem to be keeping fund managers hooked. “They are just not willing to take the trade off,” says Urquhart. “They are happier to keep the weighting in UK equities, where higher re-turns have been recorded over the last 20 years.”

The asset allocation shift may still happen, but it is certainly not imminent. “We might see some push into fixed-interest securities … the minimum funding requirement helps focus on the match between assets and liabilities but we would be surprised if there is any significant change in asset mix.” He expects no meaningful change for the next two to three years.

The Pensions Act has put solvency in the spotlight. But most funds have nothing to worry about. Bacon & Woodrow found that around 80% of schemes are more than 120% fund-ed, according to a recent analysis of its client base.

Consultancy Greenwich Associates found in a study of pension fund management in the UK that plans were on average110% funded in 1995 with lo-cal authority schemes, at 92%, the only type below 100%.

So if solvency is no problem, many funds are free to fatten up on stocks. O’Sullivan reckons schemes at 140% could be entirely in equities.

There are personal reasons, too, why a fund manager might like to keep eq-uity weightings up. “Every pension fund manager is being remunerated in terms of performance,” says Trevor Greetham, global strategist at Merrill Lynch.

And stocks are expected to do far better than bonds. Pension funds ex-pect the FT All-Share Index to yield an average rate of return of 9.8% over the next five years, while long-dated gilts give an average 7.9%, according to the Greenwich Associates study.

Greetham says he is sceptical about the asset allocation shift: “I think it’s going to be a very slow process.”

But whether or not funds are busy implementing strategic shifts into fixed-interest instruments in 1997, they may well shy away from the stock market for the time being. This year is likely to be a flat one for equities with the spectre of higher interest rates in the UK frightening potential buyers. Today’s share prices could be at precarious levels. “The market is discounting a lot of growth and any slight setback could be detrimental,” says O’Sullivan.

Richard Jeffrey, group economist at merchant bank Charterhouse, ex-pects stocks to end the year at current levels, yielding a total market return of no more than the dividend yield - just under 4%. Last year’s total market return on UK equities was 16.7%. He predicts “a return of just 10% for the half year, but in the second half the market will drift down again and end about the same as it started.”

The market has been buoyed by strong institutional buying and im-proving confidence on the economic front, but this year a pick-up in inflation and the monetary tightening needed to keep it in check will weight stocks down, Jeffrey says.