Feature:The Long and Short of It

Illustration by Christian Northeast

“The major shift in the asset allocation of European pension funds”, says Luc Vanbriel, Head of Institutional Business Development at KBC Asset Management, “is not from long term to short term, but from long-term equity investments to long-term fixed income. This is mainly due to the pressure of international accounting standards—the present value of the liabilities is discounted at the yield curve, so investing in equities can create a mismatch—and the fact that most pension funds at the end of 2008 were less overfunded than before, so the volatility of the assets became too high in comparison to the ‘buffer’ they had.”

Sarah Turner, Head of Trustee Proposition Management, Corporate Marketing, at Aegon UK, offers a point of view that concurs with Vanbriel’s, saying that she does not observe or expect any move by European pension funds into short-term investing. “I think that if funds were moving to short-term results”, she says, “what they would end up doing is buying into the volatility of the markets. Ultimately, from what I’m seeing, that does not appear to be the case because, if anything, they are moving towards ensuring that assets and liabilities are matched closely.”

The Purple Book, published by the UK’s Pension Protection Fund, illustrates the composition of UK pension funds and the spread of their investments. Its most recent publication, from November of last year, shows that pension funds in the UK are focusing their investments on the long term.

The seventh chapter of The Purple Book, ‘Asset Allocation’, points to “a continuation of trends seen in recent years: a falling equity allocation and rising allocations to bonds and ‘other investments’; within equities, rising overseas and falling UK allocations; and within bonds, rising corporate bond and falling government allocations”.

In the next point, The Purple Book reads: “The equity allocation as a proportion of total scheme assets fell to 42.0% from 46.4% in 2009. Meanwhile, the share of gilts and fixed interest increased to 40.4% from 37.1% in 2009. The share of ‘other investments’ rose from 4.5% to 5.4%.”

The figures are instructive in that they reflect accurately the state of the UK economic and political landscape. The fall of equity investments and the concurrent rise overseas is an indicator of the parlous state of the UK economy. Likewise, the increase in the share of gilts and fixed-interest products represents a move towards longer-term and safer investments.

Marcus Whitehead, Partner and Head of Investment Consulting at Barnett Waddingham, offers his view on The Purple Book. He says: “The data, which is only a few months old, shows how the asset allocation of UK final salary pension schemes has changed over the years. It shows that, at the moment, you have about 40% in equities and the same in bonds, then 20% in other bits and pieces such as property and alternative investments.