More than three-quarters of UK pension funds that increased allocations to equities in the past six months cited pressure to meet funding requirements as a driver, according to research.
While low yields on gilts have made them an unattractive investment for many pension schemes, investment experts have warned against schemes holding too much risk.
Investment manager State Street Global Advisors surveyed 420 investment decision-makers from global pension schemes in its ‘Walking the tightrope’ report, which looked at institutional investors’ attitudes to equity risk.
It found 80 per cent of UK respondents that had increased equity allocations over the past six months said their decision was driven by funding requirements.
This compared with a global average of 64 per cent, which was as low as 28 per cent for France and 15 per cent for Germany.
“According to the research results, it seems UK investors are feeling the pressure to meet funding requirements much more than some of the other European countries,” said Niall O’Leary, head of EMEA portfolio strategy at SSGA.
Desperately seeking returns
Danny Vassiliades, principal at investment consultancy Punter Southall, said low gilt yields were increasing liabilities and with it the need to generate returns.
If they have a long-term destination for their funding they’re not going to get there by investing in bonds. Plugging the funding gap will only come from increasing the risk
Danny Vassiliades, Punter Southall
He said: “If they have a long-term destination... they’re not going to get there by investing in bonds. Plugging the funding gap will only come from increasing the risk.”
However, consultants said the number of schemes increasing their equity allocations overall had been low, and those upping their exposures should be mindful of the risks.
“I’ve seen more clients reducing their equity allocation,” said Rob Guthrie, partner at consultancy LCP. “It’s important trustees make decisions for the right reasons and not just to meet actuarial assumptions.
“Equities aren’t the only way to go, but they’re the [assets] you naturally assume the highest returns [come] from.”
Guthrie added that schemes looking to increase returns may remove hedges as a way of reducing cost, for example, but said it was not something he was advising clients towards.
Paul Kitson, partner at consultancy PwC, said schemes increasing the equity risk in their portfolios tend to be doing it in a balanced way.
He said: “We are seeing some clients who are increasing their exposure to equity, but they are doing it in tandem with other changes that will leave the scheme in a similar risk position overall.”
John Belgrove, senior consultant at Aon Hewitt, said the UK had moved down the ranks in terms of equity exposure during the past decade.
Exposure to emerging market equities is increasing, he said, but it was typically funded from developed market equity allocations.
“Many investors are beginning to see relative value in [emerging market equities],” he added.
