31 October 2014

IPE: UK pension funds shy from liability-matching in favour of alternatives

UK defined benefit pension funds have slowed their shift towards risk-reducing fixed income investments while allocations to alternatives saw a bump, as revealed by latest figures from The Purple Book, published by The Pensions Regulator (TPR) and the Pension Protection Fund (PPF).

In its ninth year, the book shows DB schemes have 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. Allocations increased by 8.3 percentage points between 2009 and 2013, with significant jumps year on 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. Within equities, the shift away from UK stocks towards global and unlisted ones was also a strong trend. 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%.

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