UK pension funds in historic move to safe havens

worldtraveller

UK pension funds have reached a “watershed moment”, holding more bonds than equities for the first time since the 1950s.

Fund managers have been gradually moving towards bonds since about 2002 in order to overcome stock market volatility but leading City fund managers say the so-called “cult of equity” is now dead.

The cult of equity dates back to 1956 when George Ross Goobey made a speech promoting equities as a way of generating growth linked to inflation.

Data from the Pensions Regulator show that UK funds are now holding the biggest allocation of gilts and fixed interest since records began six years ago, according to the Financial Times.

UK funds hold 43.2pc in bonds compared with 38.5pc in equities.

The regulator monitors more than 6,000 defined benefit pension schemes.

Telegraph.co.uk

kidmugsy

worldtraveller wrote: »

UK pension funds have reached a “watershed moment”, holding more bonds than equities for the first time since the 1950s.

" in order to overcome stock market volatility"
...

That they are holding more Gilts I can believe. Why they are doing so might be less certain. (i) Effect of regulation? (ii) Because more members are in or approaching retirement?

hugheskevi

They are actually holding more corporate bonds - although holdings of gilts, corporate bonds and indexed bonds are increasing, within that the composition is increasingly made up of corporate bonds with total gilt holdings constant or declining slightly.

Not surprising - traditionally in Defined Benefit schemes pensioner liabilities are matched with fixed interest and active/deferred liabilities invested in assets with higher investment risk. Given most schemes are closed, the liabilties increasingly relate to pensioner members.

Then there is the impact of regulation, including PPF levy, assessment, deficit recovery plans, and the effect of volatility on corporate balance sheets and the sponsors credit rating.

Also, many scheme liabilities have got so large their sponsor cannot afford any volatility as the pension scheme is so much bigger than the sponsoring company, eg, companies such as BT, the banks, BA and so forth can reasonably be described as large pension funds with a sideline in their actual industry.

gadgetmind

When you start seeing predictions of the death of the cult of equities, you know that it's the start of a great time to be holding equities!

A few more articles like this and I'll get busy with ditching my bonds.

dunstonh

It's funny how the media have turned pension funds moving to protect liability into the death of equities. Lets find one subject and make it mean something else.

Plus, my favourite media line is clearly being abused as per normal. "Since records began".

Data from the Pensions Regulator show that UK funds are now holding the biggest allocation of gilts and fixed interest since records began six years ago, according to the Financial Times.

Records began only 6 years ago. What sort of history is that? it doesn't include the dot.com crash for starters. The move to bonds after the dot.com crash was significant as well.

This is the stupidest media article since records began yesterday.

Debt_Free_Chick

The move to fixed income (bonds, gilts) is largely due to risk reduction. As the pensions to be paid in the future are regular income streams, fixed income is a better match.

In addition, the way in which pension scheme deficits are reported in the Company's account mean that holding more in fixed income will, eventually, lead to less volatile accounting deficits.

DB schemes are effectively dead. They are being "run-off" and increasing the assets held in fixed income is a natural consequence of this.

opinions4u

As final salary schemes stop taking on new members and can more clearly forecast their liabilities to retired / retiring members a lower risk investment mix become inevitable,

Daniel_Elkington

And, they always seem to mention 'pension funds' but actually mean 'final salary pension funds' and confuse the hell out of all the investors still stuck in with profits or simple managed funds.

This is natural - regulation has told these funds to make conservative projections based on gilt yields. It is only sensible to hold the assets upon which your projections are based.

Additionally, as mentioned, a lot of these funds are essentially closed and consist of a big pot to pay their technical provisions, bonds represent a way to mathematically control the amount of income available and are an easier way of ensuring that returns actually match up to the maths which power the amount of funding necessary.