In a press release, BNY Mellon said this decline is largely due to funds continuing to reduce their weightings in UK Equities, which fell from 34.4% to 28.7% – the lowest ever allocation to this asset class. Overseas Equities also fell from 28.3% to 26.4%.
Asset allocations to Bonds and Index-Linked increased from 23.9% to 27.6% and from 7.8% to 9.6%, respectively, the release said. By the end of 2007, allocations to Non- gilts were 14.1% and allocations to Gilts were 11.8%. Allocations to cash increased to 3.1%, up from 1.7%.
Allocation to Other Assets increased during 2007 from 0.8% to 1.6%, reflecting the greater number of pension funds investing in alternatives, particularly Hedge Funds and Private Equity. However, just one in eight pension funds invest in Other Assets and the typical commitment is around 6% of assets.
The weighted average return for UK pension funds for 2007 was 6.4%, BNY Mellon said – the fifth consecutive year of positive performance. Over the last five years UK pension funds have averaged 12.1% per annum, and over 10 years, pension fund returns have averaged 6.5% per annum.
UK pension funds enjoyed low return volatility in 2007. According to the announcement, 80% of schemes have seen volatility, as measured by the standard deviation, of between 5.1% per annum and 7.8% per annum over the last five years.
Alan Wilcock, Performance and Risk Analytics Director at BNY Mellon Asset Servicing, said in the release that since equity markets have fallen thus far this year, UK pension funds are likely to see increases in both volatility and tracking error statistics.
At the end of 2007, BNY Mellon Asset Servicing measured the performance of 423 pension funds, representing 1873 separate manager portfolios with a total market value over 203 billion euro.