UBS Study: UK Pension Assets to Jump 40%

The survey by UBS Asset Management said pension assets should continue to expand even though the tax and social security system may discourage people on lower incomes from saving, according to a Reuters news report.

Britain’s pensions industry has come under a harsh spotlight as falling stocks have wiped billions off asset values and growing life spans, and expectations have boosted liabilities. “If these combined forces result in a deeper understanding of the real investment needs of the individual pension scheme…we may well look back on this time as the dawn of a new improved era in British pensions,” the report said, according to Reuters.

Hundreds of British firms, including blue-chip names like Marks & Spencer, have shuttered defined benefit plans to new staff recently, saying they are too costly (See    UK Accounting Board Blames Bear Market for DB Demise ). Yet UBS believes the defined benefit arrangement is far from dead. “Defined benefit schemes, under increasing pressure, will continue to account for the lion’s share of occupational scheme assets for at least a decade,” UBS researchers wrote.

In terms of pension asset allocation, UBS Asset Management predicted that the proportion of pension assets held in British equities will continue to decline as money managers spread their stock holdings globally. Bond holdings will continue to get stronger, the report said.

Falling stock markets and declining bond yields have also increasingly focused pension funds on alternative assets, notably property, private equity and hedge funds. The report pointed out funds can tap real estate by buying property directly or buying property unit trusts and shares.

At present, only 24% of British pension plans invest in private equity funds. In a study of large tax-exempt investors with assets worth $3 billion, UBS calculated private equity accounted for 3.7% of all holdings at the end of 2001, while hedge funds accounted for 1.8% (See  UK Investors Increasing Private Equity Bets ).

Pension funds’ transaction costs will fall due to new technology and demands for more openness on costs the UBS report added.