The equity market boom has left corporate pension schemes running an increasingly high amount of stock market risk, at a time when many are looking to derisk strategically.
Data released last week in the Investment Management Association’s 2014 survey show equities make up 46 per cent of private sector funds’ specialist mandates – that are not liability-driven investment or multi-asset mandates. This is up from 40.4 per cent last year and 41.4 per cent in 2012.
These raw, unweighted survey figures back up what was revealed in UBS’s Pension Fund Indicators survey, which showed strong performance had pushed up equity allocations within schemes’ portfolios after a low in 2011.
Many corporate pension schemes are intending to reduce their equity exposure. Patrick Bloomfield, partner at consultancy Hymans Robertson, said: “It’s still a popular source of return, but most schemes are much more balanced and diversified than five or 10 years ago.”
But current market conditions make some less risky assets much more expensive.
Nick Motson, lecturer in finance at Cass Business School, said: “[Rather than] locking in such low yields for such long periods of time, perhaps they have decided to stick with risky assets.”
Current low gilt yields were forcing the issue for schemes, according to Darren Ruane, head of fixed interest at Investec Wealth & Investment.
“Unless scheme sponsors choose to make up any funding shortfalls through increased contributions, it is likely that the schemes may need to rely on better equity returns to help repair deficit burdens,” he said.
The company forecasted “materially higher returns for equities relative to bonds” in the coming years, he added, supporting in his view a higher level of equity risk.
A headline finding in the IMA survey was the increasing use of derivative-based strategies such as currency overlays and LDI portfolios, which were driving the rise in alternatives.
In-house and third-party LDI strategies increased 19 per cent between 2012 and 2013, reaching £360bn by the end of the year.
However, the association warned tracking the growth of the market via assets rather than liabilities hedged can “introduce inconsistencies of reporting”, and pointed to external KPMG data demonstrating the increase in hedging coverage to £517bn last year.
Jonathan Lipkin, director of public policy at the IMA, said there had been a real shift in the industry towards “outcome-focused strategies” such as LDI.
“This moves the industry away from traditional building blocks,” he added.
