A global survey of pension schemes has revealed that a third of those in the UK are planning to reduce their exposure to UK equities this year.
The Global Pension Risk Survey 2013, conducted by pension administrators Aon Hewitt, asked 241 pension schemes based in the UK what their future plans are.
A third of respondents who provide defined benefit schemes said they were planning to reduce their exposure to UK equities while another third were looking to diversify their portfolios into alternative assets.
In total, 41% of all UK pension schemes said they were going to reduce their exposure to UK equities and 28% said they plan to reduce global equity allocation.
Increasingly, many of the schemes said they were looking to increase investment in corporate bonds and were going to be more active in seeking growth from a diversified asset class.
Shift to risk management
John Belgrove, a senior partner at Aon Hewitt, said: “Our survey shows more evidence of a structural shift by the UK pension industry away from equities being the main source of their portfolio growth.”
He added that despite equities recovering around 70% of their values from 2009 lows, pension schemes are still aiming to move away from the asset class.
Instead, UK pension fund managers are now looking at risk management by hedging and diversification rather than their traditional reliance on equities providing profits in defined benefit schemes.
The survey underlines a 12 years-long trend which has seen equity allocations within pension schemes falling from 80% to 40% whereas bond allocations have increased from 20% to more than 40%.
It’s also apparent that pension fund trustees are facing a challenging investment environment which sees low gilt yields against rapidly growing liabilities.
Move to diversify
The survey found that those pension funds with more than £1 billion of assets are leading the move towards diversification with 37% saying they will be increasing their allocation of bonds in the next year.
In addition, they say that they will also be growing their alternative asset holdings.
In part, the move away from UK equities is being fuelled by the pension funds’ long-term strategic ambition which is to be self-sufficient.
The smaller pension funds, those with assets of less than £1 billion, said that their long-term ambition was to look for a buy-out, potentially via an insurer.
Mr Belgrove said: “For defined benefit schemes, the ‘cult of the equity’ is now history and pension schemes are increasingly favouring diversification into alternative asset classes.”
Bonds, he said, were likely to play an increasingly important role within the asset portfolios of pension schemes.
