The UK’s defined benefit (DB) pension schemes returned an average of 11% in 2014, with the best-performing funds having a relatively high bond exposure, according to figures from State Street Investment Analytics (SSIA).

Preliminary estimates for the SSIA UK Defined Benefit Pension Fund Universe suggest a third consecutive strong year in terms of asset performance.

Jeanette Patrizio, senior vice-president at SSIA, said: “This latest year of positive results brings the five-year performance for UK pension funds to 9% per annum and the 10-year to 8% per annum, comfortably exceeding most actuaries’ assumptions for asset growth.”

The universe is made up of 200 pension funds with aggregate assets of £510bn (€670bn), all of which use State Street services in some way.                                                                                                                                                                                                                              However, while a high equity allocation proved beneficial in the previous two years, during 2014 it was bonds that performed best.

SSIA said a combination of disinvestment throughout the year, and underperformance relative to bonds, saw the average fund exposure to equities reach its lowest level ever, at 43%.

Corporate pension schemes now hold an average of only 34% of their assets in equities, while local authority pension schemes still hold a commitment of just over 60% to shares.

The commentary accompanying the figures said 2014 had been quite challenging for UK institutional investors, despite a generally improving global outlook.

It said: “The year got off to a bumpy start, and equity markets stalled as concerns increased around the impact of conflict in the Middle East and Ukraine.

“Conversely, bond markets performed steadily in the first part of the year before surging ahead in August, as increasing concerns about geopolitical risk, combined with the Bank of England’s reiteration that interest rates were to remain low for the foreseeable future, made UK Gilts particularly attractive for investors.”

During 2014, UK index-linked bonds returned 20%, exceptional in a period where inflation appeared to be falling.

UK Gilts also had an outstanding year, with the average fund returning 18% in this sector, well ahead of the FTSE All Stocks Index.

This performance reflects the relatively high weighting among pension funds of longer-dated Gilts.

The FTSE 15-Year Index returned a “remarkable” 26%.

However, while the strong results from bonds were positive for the asset valuations of pension funds, they had the opposite effect on liabilities, as yields fell by almost one-third from this time last year.

A late rally in 2014 meant UK equities just managed to produce a positive return of 1% for the year.

Investor concern around contagion from the struggling euro-zone, coupled with uncertainty over the coming general election, reduced their appeal for investors.

International equities, which now represent a higher proportion of the overall equity allocation of the average UK pension fund, performed substantially better, but, regionally, results varied.

The US – which makes up 60% of most global equity allocations – performed very strongly.

Markets reacted well to improved economic data and the development of fracking, which could see the US become self-sufficient in energy.

The 19% return to sterling for the year also included a favourable dollar appreciation of 6% against sterling.

Meanwhile, European equities were flat in 2014, with UK investors seeing a small negative return because of sterling’s continued appreciation against the euro.

According to SSIA, most of the UK funds prefer to access equity markets on an active basis – i.e. seeking to outperform market indices, which they did on an overall basis over the year.

In the UK, however, after four consecutive years of quite marked outperformance relative to the UK All-Share Index, the average fund tracked in line with the index return during 2014.

Exposure to alternative assets remained broadly static at around 10% of the average fund portfolio, but SSIA said the mix was slowly changing, with infrastructure and diversified growth (multi-asset) products gaining traction.

Turning to the property sector, the recovery that began in 2010 continued, with a 16% return for 2014.

Property now makes up around 7.5% of the average fund, close to its highest-ever level, and three-quarters of all funds now have exposure to this asset.