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FTSE 100 pension schemes continue to shift equities into bonds

04 February 2014

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FTSE 100 companies pension schemes are continuing the shift from equities into bonds despite the recent rally in the equity market, JLT Employee Benefits (JLT EB) has found.

According to research by JLT EB, Fresnillo is the latest company to report a big switch out of equities, with bond allocation increasing by 25% over the 12 months to 30 September 2013.

Another nine FTSE 100 companies increased their bond allocation by more than 10%, which means that a total of 59 FTSE 100 companies have more than 50% of pension scheme assets in bonds.

Overall, the average pension scheme asset allocation to bonds is 56% in comparison to six years ago when it was 36%.

Charles Cowling, JLT EB managing director, said: "Companies and trustees are continuing to switch pension assets out of equities into bonds despite a bull market in equities and a slight fall in bond prices in 2013, reflecting a long term trend in pension asset allocation in the UK.

"The tapering of quantitative easing in America could precipitate this migration further in 2014."

He said that he suspects that companies, which are starting to use liability-driven investment (LDI), are supporting the move from equities into bonds.

Cowling also said that he expects a number of schemes to prepare themselves for a buy-out, as there is higher pressure for pension schemes to de-risk.

"Whilst shareholders are keen to keep under control the increasing accounting volatility caused by the colossal size of pension schemes, trustees and regulators view buy-outs as a general, effective risk management tool," Cowling said.

"Overall, many pension schemes are now entering maturity or closing phase, so their trustees are beginning to target 'end-game strategies'."

The research also found that the combined aggregate deficit of FTSE 100 defined benefit (DB) pension schemes has deteriorated by £12m to £52m over the 12 months to 30 September 2013, while the total disclosed liabilities of these schemes have risen from £474bn to £532bn.

According to the research, six FTSE 100 companies have total disclosed pension liabilities greater than their equity market value, which could have a significant impact on corporate decision-making in the boardroom.

A further 11 companies have disclosed pension deficits bigger than 10% of their equity market value.

In total, the amount contributed to FTSE 100 company pension schemes was £15.8bn, down from £18.1bn in the previous accounting year, which is more than the £6.5bn cost of benefits accrued during the year.

This represents £9.3bn of funding towards reducing pension scheme deficits, which is a decrease on the previous year's deficit funding of £12.5bn.

Cowling said: "Whilst some companies, such as BAE Systems, have paid huge cash contributions, most companies have precious little spare cash. Widening deficits, and perhaps weaker perceived sponsor covenants, will inevitably lead to trustees requesting larger deficit-correcting contributions from sponsoring employers.

"This year we expect to see a trend towards companies looking at alternative sources to fund their pension schemes. We have already seen some companies make use of property partnership deals to help tackle their pension deficits e.g. Marks & Spencer, Sainsbury's and Whitbread have used a total of £2.5 billion worth of property assets in such deals. We could see more of these unusual funding sources in 2014."

First published 04.02.2014