Top 100 asset allocation analysis: Stock market boom reflected in pension fund portfolios


Investing for growth is still a priority, even as schemes are generally maturing and charting their way towards an endgame, Pensions Insight’s analysis of the 100 largest DB schemes has revealed.

Equities still make up a significant proportion of assets, and this has increased slightly over the past year – from £154bn of their collective portfolio in 2012 to £190.7bn in 2013.

Naturally, the movement of markets will have had an impact, so as equity returns improved they began to take a bigger slice.

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“We’ve had terrifically strong equity market since the financial crisis, the S&P bottomed at 666 and is now more than 1800 – a trebling of the market even without counting dividends,” says Roger Gray, chief executive of USS Investment Management Ltd. But what impact has this had on scheme funding levels?

To repair funding levels, funds need to hold on to their equity

“The gains last year were sufficient to bring [schemes looking to remove risk] back into line with their plan, but not enough to trigger further de-risking,” says Sorca Kelly-Scholte, managing director, client strategy and research at Russell Investments.

“To repair funding levels, funds need to hold on to their equity.”

Alex Waite, a partner at LCP, says: “The trend has been people taking profit from equities and locking in better funding levels rather than putting money back in the market. The net effect has been that the allocation is up because of the market.”

But the increase is not just about market fluctuation.

“There’s also a degree of people becoming genuinely more positive over the turn of the year,” says Antony Barker, pensions director at Santander UK plc.

As the economy shows signs of improvement, pension schemes seem more inclined to buy shares, but their strategies have shifted in the process.


“The trend in equity mandates has probably been more one of global unconstrained than country specifics,” says Barker. Allocations to domestic and overseas equities have both gone up – 17.7% and 10.8% respectively.

Both would benefit from an increase in global equity investment as a package, even in conditions where, for example, emerging markets were underperforming.

As equity markets went up, bonds came down, and the top 100 schemes withdrew 0.3% of their total fixed income allocation. With gilt yields at just 2% they held little appeal for schemes trying to plug their deficits. “Bonds being down is not surprising, given the yield and the saturation,” says the pensions manager of one top 100 scheme.

“Obviously quantitative easing has a bearing on that as well.”

The Bank of England’s stimulus programme has frequently been criticised for its damaging impact on fixed income returns. There was a geographical discrepancy, though – schemes were moving out of domestic bonds but, of those which reported the split, many had turned towards overseas fixed income, which was up from £19.3bn in 2012 to £40.5bn by 2013 for those schemes that reported an allocation to the sub-asset class in both years.

We have been gradually reducing the proportion of equities and increasing the proportion of bonds

Not every scheme followed the pack.

USS’s Gray says: “We have been gradually reducing the proportion of equities and increasing the proportion of bonds from what would be a very high level and low level respectively in terms of pension funds.”

As he says, such decisions ultimately depend on the position the scheme is in and what it is trying to achieve in terms of the balance between growth and de-risking.

“More schemes are looking at risk baskets, not asset classes,” says Sven Lidén, chief executive officer of Adveq, an asset manager that specialises in private equity.

“Looking at risk in a different way will change allocations.”

For some, corporate strength isn’t what it was

This is a response to schemes’ need to re-think their approach in the light of rising liabilities and a low-rate environment. “For some, corporate strength isn’t what it was. Some are looking at taking slightly more risk, despite many having a glide path towards bonds,” says a top 100 pensions manager.

“In the past two or three years there has been more noticeable shareholder voice saying ‘we’ve been patient’, and some of them are getting louder, asking for bigger and better dividends. Corporates have to either start eroding the pension offering or ask trustees to remain in higher-risk strategies.”

There has continued to be a migration within growth investment from equities to diversified solutions

Likewise, there is an emerging trend of schemes turning to multi-asset vehicles to achieve growth while minimising volatility. This is a particular concern for employers as they need to report and explain their exposure to volatile markets.

“My experience is that there has continued to be a migration within growth investment from equities to diversified solutions,” such as diversified growth funds, says Steve Delo, chief executive of PAN Governance.