UK – UK pension funds switched from equities to bonds in 2003, according to new analysis from WM Co.

WM said in its annual estimate of UK pension fund returns that pension funds “took the opportunity of UK equity strength to switch money into UK bonds indicating that they are mindful of their overall strategic direction to increase UK bonds but that they have a market timing overlay”.

UK equities returned 21.2% last year while bonds returned 3.6%.

WM's report follows UK government data which showed that pension funds invested a net three billion pounds (4.3 billion euros) in UK government bonds in the third quarter of 2003.

WM, part of State Street, put UK pension funds’ return for 2003 at 16.8% - which compares with Russell/Mellon CAPS’ estimate earlier this week of 15.8%.

“After a poor start, UK pension fund returns accelerated throughout the rest of 2003 to achieve a result for the year of 16.8%,” said WM consultant Graham Wood. “This is the first positive performance since 1999.”

Wood added: “There is no doubt that 2003 will have offered pension funds some welcome relief from the gloom that has enveloped them in recent years.

“Many will have had their funding positions improved as a result of the returns available. It remains to be seen whether these improvements will continue through 2004.”

WM said that UK segregated pension schemes paid out money last year, which it said demonstrates the increasing maturity of the UK pension fund industry. “Benefit payments exceeded receipts from employee and employer contributions and the income generated on investments.”

Meanwhile, a survey by Mellon Financial Corp.’s Human Resources & Investor Solutions group indicated that employees would be willing to pay more for defined benefit schemes in the future.

Mellon found that 73% of respondents felt that employees were likely to pay more for a pension.

“Our survey results suggest the trend that has developed for employers to close occupational defined benefit schemes or scale down benefits is short-sighted,” said Kevin LeGrand, HR&IS head of technical services.