Over one third of UK pension schemes plan to reduce further their exposure to domestic equities in 2013 with the same proportion planning to increase diversification into alternative assets over the year, according to Aon Hewitt’s Global Pension Risk Survey 2013.
The report finds 41 per cent of DB schemes expect to reduce their exposure to UK equities over the next 12 months, with 28 per cent planning a reduction in allocations to global equities throughout 2013. But some schemes said that they see equities as a buying opportunity.
A significant proportion of schemes intend to increase investment in corporate bonds and alternatives – as well as making more use of derivative strategies and active asset allocation in a bid to seek growth from a more diversified asset pool.
The decline in equity holdings is a continuation of a longer term trend of the past 12 years, during which average equity allocations have almost halved from nearly 80 per cent to 40 per cent, while bond allocations have more than doubled from around 20 per cent to over 40 per cent, making bonds the new dominant asset class.
Larger schemes with over £1 billion of assets are the most committed to diversification with a net 37 per cent expecting to increase their portfolio allocation to bonds over the next 12 months. In the same period, nearly half the schemes of this size are planning to grow their alternative asset holdings as they work towards self-sufficiency. This represents a greater level of diversification compared with smaller schemes with under £1 billion assets, which more commonly have a long-term goal of achieving an insured buy-out.
John Belgrove, senior partner in Aon Hewitt’s investment consulting team says: “The results of the survey provide more evidence of a structural shift in the UK pension industry’s view of equities as the main source of portfolio growth. Despite an equity performance recovery of around 70 per cent from the low point of 2009, schemes continue to display a desire to move away from the asset class. While equities will continue to play an important role in scheme portfolios, the focus for the future is on risk management through hedging and diversification. The ‘cult of the equity’ is history for DB schemes.
“But trustees and sponsors continue to face a challenging investment environment and, due to the ongoing low level of gilt yields, they have also been tasked with coping with upwardly spiralling liabilities. As the battle for deficit reduction intensifies, what we have seen is a growing focus on developing more sophisticated asset management strategies that aim to provide equity-like growth potential with bond-like volatility.”