UK defined benefit (DB) pension funds have slowed their shift towards risk-reducing fixed income investments while allocations to alternatives saw a bump, latest figures reveal.
The data comes from The Purple Book, the most authoritative set of DB statistics, published and analysed by The Pensions Regulator (TPR) and the Pension Protection Fund (PPF).
In its ninth year, The Purple Book shows the DB universe of 6,057 schemes has collated assets of £1.13trn (€1.43trn) as of the end of March 2014, with a funding level of 67% on a full buyout basis.
The book showed DB schemes had begun to level out a shift from UK Gilts toward corporate fixed interest and index-linked bonds.
Index-linked bonds accounted for 41.1% of the total bond allocations, an increase of 20 basis points from 2013.
However, allocations increased by 8.3 percentage points between 2009 and 2013, with significant jumps year on year.
This trend was at the expense of UK Gilts, which saw its share of bond investments fall by 10.5 percentage points over the same period.
However, that has now increased by 10bps over the last year.
Overall, scheme allocations to bonds fell by 10bps to account for 39% of investable assets.
Stephen Rice, the PPF’s chief actuary, said there was no concrete reason for the levelling-out, but he suggested it might have to do with the pricing of assets.
“It has been levelling off,” he said. “If I were asked to speculate as to why, I would suggest it is because [index-linked bonds] are very expensive. Real yields are pretty much negative.”
He also said the slowdown in a shift from equities might also be due to the costs of switching.
A trend of outflows from equities did continue, with allocations now accounting for 39.4% – an 80bps drop and the first time it has fallen below 40% since the Book’s inception.
However, within equities, the shift away from UK stocks towards global and unlisted ones was also a strong trend.
Private equity now accounts for 8.7% of equity allocations, having only accounted for 1.9% in 2009.
Overseas equities’ share of allocations rose by 1.1 percentage points to 62.4%, with these stocks now accounting for more than double that of UK stocks, which take up 28.9%.
The rise of alternatives, excluding property, continued, as hedge-fund allocations rose by 1.2 percentage points to 6.2% and ‘other’ asset classes rising 40bps to 3.9%.
While risk-reduction in investment portfolios had levelled, other measures used by DB schemes were on the up.
Schemes covered by the Book received around £25.6bn in deficit-reduction contributions, as the average recovery plans increased to 8.4 years.
Buy-ins, buyouts and longevity hedges also reached a new peak over the year, with the 15 months from the start of 2013 seeing £24bn of these arrangements – in around 270 deals – an increase of more than a 100.
Andrew McKinnon, PPF CFO, said: “The Purple Book has shown a slowdown in de-risking, demonstrating the steady decline has levelled off and could point to the end of a long-term trend.”