UK Funds Reconsider Investment Mix

November 6, 2006 ( - Funding ratios for UK corporate pension plans are moving in the wrong direction, prompting 80% these funds to consider significantly changing their asset allocations in the next three years, according to a study from Greenwich Associates.

Average funding ratios for UK corporate pension plans declined to 91% in 2006 from 92% in 2005, while local authorities saw funding ratios of their pension plans fall to 77% from 78%, Greenwich Associates said in a press release. Greenwich Associates consultant Chris McNickle pointed out in the release that, while these numbers do not seem significant, they are surprising given strong investment returns and significant sponsor contributions.

As UK funds struggle to balance the long-term viability of maintaining and funding traditional final salary plans and the risks that potential investment losses pose to income statements and balance sheets under mark-to-market accounting rules, Greenwich Associates found that many UK funds wish to increase their asset allocation to fixed interest vehicles. However, weak returns do not permit this strategy. Allocations to fixed interest vehicles declined from 2005 to 2006 due to strong gains on equity investments, the release said.

Instead, according to one consultant, many plan sponsors are adopting absolute return strategies and a few are experimenting with liability-driven investment (LDI) strategies. The Greenwich Associates study found that 10% of plan sponsors have plans to implement an LDI solution in the future.

While institutional investors globally have been turning increasingly to alternative investments to boost funding, UK funds are slower to jump on that bandwagon. While property allocations average 6% of UK pension assets and are rising, allocations to hedge funds and private equity have yet to break 1.5%. However private equity represented 0.9% of institutional assets in 2001, topped 1% between 2003 and 2004 and currently represents 1.2% of total assets. Meanwhile, in 2002, hedge funds made up around of 0.1% of UK pension assets and averaged 1.1% in 2005.

The proportion of UK funds using private equity increased to 21% in 2006 from 17% in 2005, while hedge fund use increased to 13% of funds in2006 from 10% in 2005.

Greenwich Associates interviewed 412 professionals at the largest UK pension funds for the study. A copy of the study report can be purchased by going here .