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UK DB schemes to reduce equities in 2013

15 April 2013

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Over one third of UK defined benefit (DB) schemes plan to reduce their exposure to domestic equities in 2013 and one third are looking to increase diversification into alternative assets, according to a new survey.

Aon Hewitt's Global Pension Risk Survey 2013 revealed that over the next 12 months, 41% of 241 UK pension schemes that participated in the survey expect to reduce their exposure to UK equities and 28% plan to reduce allocation in global equities.

Many schemes intend to increase investment in corporate bonds and alternatives and plan to make more use of derivative strategies and active allocation as they seek growth from a more diversified asset pool.

John Belgrove, senior partner in Aon Hewitt's Investment Consulting team, said:
"The results of the survey provide more evidence of a structural shift in the UK pensions industry's view of equities as the main source of portfolio growth.

"Despite an equity performance recovery of around 70% from the low point of 2009, pension 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 defined benefit schemes."

Aon Hewitt said that the findings of the survey displayed the continuation of a longer term trend of the past 12 years, where the average equity allocations in pension schemes have decreased from nearly 80% to 40%, while bond allocations have increased from around 20% to over 40%.

Trustees and sponsors are continuing to face a challenging investment environment, because of ongoing low level gilt yields and the fact that they have to deal with spiralling liabilities, Belgrove said.

He added: "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."

Funds with over £1bn of assets are the most committed to diversification with a net 37% expecting to increase their portfolio allocation to bonds over the next 12 months.

Nearly half of the schemes of this size over the same period are planning to grow their alternative asset holdings as they work towards self-sufficiency. Smaller schemes with under £1bn assets more commonly have a long-term goal of achieving an insured buy-out.

Belgrove said: "We expect to see further demand from trustees for asset solutions such as diversified growth funds and even more use of derivatives as pension schemes strive to reach their long-term objectives.

"Having said that, innovative strategies can create significant governance challenges for both large and small pension schemes. This is driving up demand for fiduciary management or delegated investment, as schemes outsource to third party specialists."

First published 15.04.2013