Half of pension funds shift investments from equities to bonds

Survey of over final salary scheme managers reveals changes to investment strategies

Schemes adopting greater range of diversifying asset classes

Nearly half of pension schemes managers have undertaken an investment shift from equities to bonds during the past 12 months according to research released today by Aon Consulting, a leading pension, benefits and HR consulting firm. Aon conducted a survey of over 100 defined benefit pension managers across the UK, asking a series of questions regarding changes made to their investment strategies in the previous 12 months.

Nearly half (46 per cent) of schemes said they had reallocated investments from equities to bonds. Breaking this down, almost a quarter of schemes (23 per cent) reallocated a major shift[1] from equities to bonds and the same proportion reallocated a minor shift[2] in the same way.

The survey found that just over half 54 per cent had made no change at all to their investment strategy.

Growth of non equity assets

The survey found that pension schemes have adopted a wider range of diversifying asset classes, which are used to reduce investment risk without reducing expected returns. UK property continued to be the most popular non-equity asset, with almost half of all schemes (44 per cent) holding this investment type in their portfolio.

Diversified growth funds have also proved popular with schemes, with a fifth choosing to invest at least part of their portfolio in such vehicles. Over two fifths have invested in private equity or hedge funds (absolute return funds), whilst a fifth have invested in diversified growth funds.

Among other findings, commitment to liability driven investment (LDI) has not grown significantly. The 13 per cent of schemes choosing to match assets and liabilities in this way remained at similar levels to Aonís 2007 survey. The stagnation is largely due to the relatively low levels of long-term interest rates, keeping the price of LDI strategies too high for many trustees and sponsors.

Commenting on the findings, Daniel Peters, investment consultant and actuary, said:

ìItís no surprise that as pension schemes mature and trustees become increasingly risk aware, nearly half have moved some part of their growth portfolio into matching assets. To reduce volatility further, growth assets require diversification away from equities.

ìAlternative assets such as funds of hedge funds that have low correlations with more traditional investments can be used to target a similar level of return to equities but with lower volatility. Indeed, whilst equity values fell over the first quarter of 2008, many funds of hedge funds have proven remarkably resilient.

ìInitial indications show that during the credit crunch and the subsequent fall out already seen during 2008, volatility of these funds is considerably reduced compared to the traditional equity-only strategies.î