Schemes flood into short-term assets to fund payments

These assets accounted for 19 per cent of scheme portfolios in 2011, compared with just 5 per cent in 2001, according to the latest data released in the Office for National Statistics’ Pensions Trends report last week (see graph). This covered £1.4tn of assets in self-administered pension schemes such as defined benefit funds.

Short-term assets include cash and investments which mature within one year of their originating date. The ONS data point to an accompanying decrease in long-term assets such as property, overseas government bonds, and loans.

“A number of schemes are in a cash-negative situation and are holding more cash then they would have in the past to meet payments,” said Karen Shackleton, managing director at AllenbridgeEpic Investment Advisers.

The rise in short-term assets may also be due to the increased use of derivatives, swaps and triggers in liability-driven investment strategies, she said.

As long-duration investors, schemes have been encouraged to take advantage of premiums offered by long-term illiquid assets. However, as pension outflows begin to exceed contributions, they can run the risk of having to disinvest these assets at inopportune times.

“Schemes are concentrating on ensuring that part of the portfolio is extremely liquid to enable short-term obligations to be met,” said Bobby Riddaway, head of investment consulting at Capita Employee Benefits.

He added: “The main risk of short-termism is for those schemes that do not hold diverse cash-based funds, but take the risk of holding deposit accounts. The safer approach to holding short-term assets is to either hold institutional cash funds or short-dated bonds.”

The numbers also showed exposure to corporate securities, including both equity and bonds issued by corporations, has significantly decreased, and in 2011 accounted for 53 per cent of portfolios, compared with a high of 76 per cent in 1993.

The ONS found the proportion of UK corporate securities held by schemes had fallen from 81 per cent in 1987 to 57 per cent in 2011. In comparison, overseas exposure accounted for 43 per cent of portfolios in the most recent data compared with 19 per cent in 1987 (see graph).