UK Pension Allocation to Bonds Loses Steam

July 5, 2005 ( - A new Mercer Investment Consulting survey has found that the move by UK pension plans from equity to bond positions continues, but has slowed slightly.

A Mercer announcement said that the poll of more than 400 UK pension plans, with a total of £142 billion in assets, found the 2005 average allocation is 35% in bonds and 63% in equities.   This represents an average 5% reduction in equity exposure over the last two years from 68% in 2003. The average allocation in 2004 was 64% equities, 34% bonds.

Further, Mercer found that the proportion of funds allocated to UK equities continues to fall and overseas equity investment now represents 41% of the average fund equity allocation.   This trend has been supported by an increased use of currency hedging, from 6% of funds last year to 13% this year.   Larger pension funds tend to allocate more of their equity assets overseas, Mercer said.  

Alternative investments such as property, private equity and hedge funds still only represent 2% of the total allocation, but the number of plans investing in these assets has increased, according to the Mercer survey. This year, the number of pension plans investing in hedge funds is expected to rise from 5% to around 12%, while interest in private equity is likely to rise from 4% to 9% of plans, Mercer said.

According to the survey, only 5% of respondents still follow a peer group benchmark strategy – a fall of almost two percentage points since last year.

The number of plans adopting structured solutions to pension liability matching, such as the use of swaps, is still low, but is expected to increase during 2005. Implementation of active currency management is predicted to rise from 6% to 10% of plans and tactical asset allocation is likely to increase from 5% to 8%, Mercer said.