The economic downturn continues to take its toll on UK defined benefit schemes, with the average allocation to equities now at 44% compared to 51% a year ago, reflecting the fall in equity values as well as active investment choices. Allocation to equities has dropped 15% since 2006 as more pension funds pursue de-risking strategies. Fixed-income has increased by 5% over 2008 and now stands at 38%, according to the National Association of Pension Funds (NAPF). Corporate bonds have seen a sizeable increase with over 76% of pension schemes now investing in the asset class. The average allocation amongst these schemes is 19% and represents the second largest asset class after UK equities.

The NAPF survey, now in its 35th year, covers 300 member funds with £410bn in assets, making it one of the most comprehensive analyses of the UK pension fund industry. Eighty-four percent of the respondents are in the private sphere, with finance and manufacturing representing the two largest sectors. This year’s survey was conducted between June 25 and August 7 and includes a new section devoted to local authorities.

In other findings, over a quarter of schemes (26%) have now implemented an LDI strategy compared to 23% in 2008 as more funds focus on how to de-risk their liabilities. The survey also shows that more pension schemes (28%) invest in alternatives, 10% higher than in 2007 as schemes continue on the path of diversification. Property is the exception with just 3.9% of assets allocated to real estate compared to 7% in 2008 and 7.3% in 2007.

“There are now 14% of pension schemes which do not invest in any UK equities and the average allocation has dropped to 23% from 30% in 2007,” notes NAPF. “Investment in global equity is now second only to UK equity in terms of asset allocation amongst all responding pension funds.” Global equity is the only equity allocation that has increased in value with the total amount invested having doubled since 2008 from 6.6% to 12.8%. Emerging market equities and active currency have the lowest allocations (3.1%), followed by infrastructure (3.8%).

The survey also asked if DB schemes planned to remain open to new members. Over the next five years, only 38% of respondents say their scheme will remain open to new members. “Change is also likely for existing members of open schemes: whilst 62% of open DB schemes expect to allow existing members to continue to accrue new pension rights, 18% plan to switch to DC provision for future accrual. In addition, 31% of schemes already closed to new members plan to switch their existing members to a DC provision.”

V.B.