Scheme derisking surge pushes gilt investment to further heights

The data reflect a banner year for gilts with almost £24bn invested by schemes. This is compared with £7.2bn in 2012 and £10.9bn in 2011. Meanwhile, UK equities saw outflows of £7.4bn in 2013 and overseas equities had outflows of more than £3bn.

John Belgrove, senior partner at consultancy Aon Hewitt, said there has been a meaningful long-term trend towards buying bonds and selling equities in derisking programmes.

“Schemes are asking themselves, ‘Would I be unwise enough to buy bonds when interest rates are going up?’,” he said. “But the reality is that it is the long-dated yields that are interesting to pension schemes and not short-term overnight rates.”

Schemes also upped holdings in UK corporate bonds, investing £2.7bn in 2013 compared with £740m in 2012 and outflows of £701m in 2011.

The US Federal Reserve’s announcement on the tapering of quantitative easing led to a rise in bond yields which presented an opportunity for schemes to start accelerating their hedging programmes on better prices, Belgrove added.

There was a reversal of fortunes for overseas bonds in the second half of the year, after sell-offs of £1.7bn in the first six months. There were inflows of £2.3bn in the third quarter and £2.6bn in the fourth quarter. This marked the highest inflows into the asset class since the end of 2009.

Ciaran Mulligan, global head of manager research at Buck Consultants, said overseas credit, which includes global credit, emerging market debt and high-yield bonds, would likely be used in a growth portfolio rather than a risk-reducing portfolio.

“[This] is to try to benefit from a wider opportunity set and try to get diversification from the more traditional assets such as equities,” he said.

“[Schemes are looking] for assets that are lowly correlated with equities but still give additional yield – and that is where global credit, high-yield and EMD come to the fore.”