Administration December 5, 2006

UK Pension Fund Managers Flee to Safety in Bonds

May 24, 2005 (PLANSPONSOR.com) - Money managers running UK pension funds are increasingly fleeing the equity markets in favor of fixed income positions.

Reported by

Fred Schneyer

A news report in The Guardian said pension fund managers sold off £40bn of stock last year in a move for safer ground. According to the news report, the typical pension fund has 50.3% in UK shares, compared with 51.2% last year and 62.3% at the peak, in 1992, according to Russell-Mellon.

A separate survey by the Investment Management Association (IMA) found that pension assets invested in both UK and foreign stocks fell from 60% in 2003 to 56% in 2004, with bonds rising from 36% to 38%.

“The most striking finding from our survey this year is the shift in asset holdings by pension funds now under way – which we estimate to have been £40bn over 12 months out of equities and into fixed interest,” Richard Saunders, chief executive of the IMA, told The Guardian. “We believe this process will continue for some time yet, representing a fundamental reallocation of pension fund assets.”

Russell-Mellon data also showed that within the money allocated to equities, more is going into foreign shares. Overseas equity weightings in pension funds hit a new high, with North America the biggest gainer.

Despite the dramatic pension fund asset allocation shifts, overall performance figures are not exactly setting off fireworks, according to the news report.

The Russell-Mellon survey of 77 asset managers who look after £332bn in pension fund money found that over the past five years, the average return has been minus 1% a year. Over the past year the typical fund is up a healthier 7.6% but is still some way from recovering the damage done in the bear market.

Finance directors have eyed the early action taken by Boots. In 2001, the retail chain stunned the pension industry by pulling out of equities and switching its fund entirely into blue-chip bonds (See Boots Chair Reassures Members on Bond Allocation ). The switch helped the company avoid the worst of the 2000-2003 bear market and ensured that Boots would not have to pay out to close a deficit in the fund, according to The Guardian.