An analysis of the latest data from the Top 100 pension funds
To industry veterans it might not come as a surprise to find that there is a huge variation in the quality of pension scheme reporting. For those with an interest in the changing fortunes of the country’s largest investors, many funds do not make it easy to compare asset portfolios from year-to-year.
That’s where Pensions Insight comes in.
We have trawled through hundreds of pages of the Top 100 pension schemes’ most recent annual reports to bring you the ever-evolving face of private and public sector workplace pension schemes: including their size, member demographics and changing investment strategies. Of course, in some cases events have overtaken the data. For instance, the league table is yet to reflect the impact of the government’s deal with the Royal Mail pension scheme, the third largest in the country, which slashed its assets from £30bn to a modest £2.5bn.
More than six years have passed since reports first emerged from the US of a financial crisis so destructive and vast in scope that the very future of the financial system was cast into uncertainty. The UK’s defined benefit pension funds were not immune.
Stock markets dived, sponsoring employers were on red alert as the world’s economy shrunk and confidence in finance hit unprecedented lows. Despite these shocks the majority of DB pension funds have survived – some are even still open. Of course there were many victims. Those schemes that were fatally wounded by the crash and other pressures have joined the growing ranks of the DB lifeboat, the Pension Protection Fund, which is rapidly rising up the league table. How long before it knocks the giant BT scheme off the top spot?
THE RANGE OF ASSETS
Much of the past few years’ commentary around UK DB pension funds has focused on the shift in portfolios away from equities and into fixed income. In last year’s analysis of the Top 100 we revealed that domestic fixed income assets had doubled overall between 2008-11.
While this narrative has not run its course yet – after all, the bond holdings of the Top 100 grew by more than £37bn between 2011-12 – the rapid rise of alternative investments has been particularly interesting. Though alternatives’ growth within the overall asset allocation looks small, from 5% of the total in 2011 to 7% a year on, the surge within the class has been nothing short of stellar.
As an asset class, alternatives grew by a huge amount – more than a third – surpassing £41bn under management. Within the alternatives, private equity (from 47% to 36% of the total) and hedge funds (25% to 20%) have taken a hammering at the expense of an increase in derivatives. Glyn Owen, investment director at Momentum Global Investment Management, said he was “not surprised to see hedge funds and private equity drop – they are still struggling in the post-Lehman’s environment and liquidity remains a concern for investors”.
Infrastructure investment has been one of the major themes running through pensions circles. With the economy still struggling to achieve any kind of significant growth, the government has turned desperately to pension funds to pour billions of pounds into infrastructure projects.
The theory is that funds’ long-term horizons match the timescales of such programmes. And pension funds appear to have answered the call, though probably not to the extent Chancellor of the Exchequer George Osborne has been praying for. Between 2011 and 2012 over £700m fl owed into infrastructure.
Though still only accounting for 5% of all assets within the alternatives bracket, the figure will be a boost to the government and the National Association of Pension Funds, whose Pension Infrastructure Platform is generally agreed to have made disappointingly slow progress.
Being a real asset, pension funds have the underlying security of a tangible asset coupled with the prospect of enhancing returns through active asset management
The Top 100 have also added to their bricks and mortar portfolios. Now totalling £37bn, or 6% of total assets, schemes appear to be attracted to real estate markets’ inflation-linked returns and lack of correlation with other asset classes. “With gilt yields at extremely low levels property yields look attractive,” says John Claxon, director of investment at Cordea Savills. “Being a real asset, pension funds have the underlying security of a tangible asset coupled with the prospect of enhancing returns through active asset management.”
The most significant increase in interest in property from pension funds has been in index-linked, long-lease assets. Claxon explains: “A number of pension funds have established defined elements of their property portfolios to focus on assets where the rental growth is linked to the Retail Prices Index, Consumer Prices Index of fixed rental increases for the duration of a long lease or have incorporated them within their balanced portfolio.
“In addition, a number of pooled funds have been established purely to invest in index linked property which are attracting pension fund investment,” he said. And pension funds are beginning to explore more esoteric areas of real estate than traditional commercial property.
At the start of 2013, the London Borough of Islington pension fund announced it was committing £20m to residential property manager Hearthstone Investments, joining the Greater Manchester Pension Fund’s foray into real estate. As schemes continue to battle huge deficits, it seems likely they will begin tapping this return-rich sector in greater numbers.
THE QUESTION OF EQUITIES
With fixed income, alternatives and property all growing their share of the Top 100’s portfolios, some asset classes had to lose out. Although equities under management grew by £5bn, the asset class saw its hold slip ever so slightly – by 1% – to 32% of all assets.
Despite the collapse in bond yields, there has been no substantive move from pension funds out of bonds into other asset classes
This is a far cry from the glory days when schemes often had upwards of 70% in stocks and shares. DB schemes continued to close at record rates – figures from the National Association of Pension Funds show more final salary schemes closed last year than in any 12-month period since records began. Just 13% of these generous schemes are still open to new members. In theory, a declining number of new and active members should accelerate pension schemes’ shift into fixed income assets – domestic and overseas corporate and government bonds – from riskier classes like stocks and shares.
A quick glance proves this basic de-risking theory has held true over the past 12 months. “Despite the collapse in bond yields, there has been no substantive move from pension funds out of bonds into other asset classes,” says Christopher Mahon, director of asset allocation research at Baring Asset management.
But pension funds, still smarting from the hit their assets took in the credit crunch have been reluctant to get back on the equity bandwagon
“While pension funds may wish to move their bond component into higher-yielding assets, these results appear to confirm they are unable to do so as their liabilities are driven ever higher by the same forces.” Europe dominated the macro-economic picture for the first half of 2012 and appeared to be on the brink of collapse.
But the dramatic declaration of the president of the European Central Bank, Mario Draghi, that it would do “whatever it takes to save the euro”, calmed financial markets. Since then global equity markets have reached post-crisis highs. But pension funds, still smarting from the hit their assets took in the credit crunch have been reluctant to get back on the equity bandwagon.