Equity allocation by UK pension schemes continues to fall, but the assets are being re-allocated into “everything else except gilts”, according to Mercer chief investment officer, Andrew Kirton.
Last year equities allocations by UK pension funds fell by 5 per cent, according to Mercer, as they attempt to deal with the enormous amount of pension liabilities. Kirton estimates there is £1-trillion worth of liabilities in the UK pension system.
However, because government bonds are so expensive, allocations are tending to move into other defensive assets, such as property and asset-backed debt.
“Equities have fallen progressively and last year fell by 5 per cent on average,” he says. “Last year property debt became popular for the first time here, and the way we are advising pension schemes is encouraging that. We are saying to have a risk-reducing portfolio and a growth portfolio, and diversify both portfolios.
“The UK government us paying 2-per-cent yield for 10 years – we haven’t been at these levels since 1760. The US is also at a record low of about 1.5 per cent. So the government can borrow at less than the rate of inflation, which is a good deal, but for investors it’s another question.”
Mercer also expects the demand for inflation-linked bonds to continue.
The UK has the highest allocation to equities when compared with its European peers.
According to the 2012 Mercer European Asset Allocation Survey, UK funds allocate 43 per cent to equities, compared with the allocations of the well-respected systems of The Netherlands at 24 per cent and Denmark at 20 per cent.
In the UK the most popular alternative assets are diversified growth funds, global tactical asset-allocation funds (global macro), fund of hedge funds and emerging markets debt.
In continental Europe the most popular alternatives, according to Mercer, are emerging markets debt, high-yield bonds, funds of hedge funds, commodities and private equity.
The UK market is undergoing a transformation, with a trend for defined-benefit funds closing to new entrants. The UK has about 10,000 pension schemes, and the defined-benefit system is prohibitive to mergers because of the difficulty in pooling liabilities.
This week auto-enrolment, an opt-out defined-contribution system for employees without pension coverage, was introduced in the UK.