UK Pensions Equity Following Over?

November 4, 2008 ( - A new Greenwich Associates study found that UK pension funds gave up their dedication to equity allocations just in the nick of time.

In a press release, Greenwich said a more than 5% cut to pension fund equity allocations last year probably served as the final death knell of the so-called “Cult of the Equity” — a death that came only months before the onset of the current worldwide financial crisis.

Overall equity allocations fell by 5.2% from 2006 to 2007, and fell 11% since 2003. Domestic stock allocations have dropped more than 12% in the past five years.

According to Greenwich, the move to improve risk-adjusted returns by diversifying portfolios with international exposure seems to be approaching a point of equilibrium. Allocations to international equities dropped to 28.4% of total assets in 2007 from 28.5% in 2006 – the second consecutive year that these allocations have declined.

Assets shifting out of equities are moving primarily into fixed interest, according to the Greenwich Associates press release. Fixed-interest allocations overall increased to 30.0% in 2007 from 28.9% in 2006. However, allocations to UK fixed interest fell to 7.2% from 8.2%, while institutions reported increases in allocations to corporate/credit bonds and international fixed interest.

The results of the Greenwich Associates study suggest that UK plan sponsors into to continue this shift through the second half of 2008. Two-thirds of U.K. final salary plan sponsors interviewed in the first half of 2008 said they intend to make significant changes to their asset mixes in the next three years.

That is especially the case among the largest U.K. pension funds, more than three-quarters of which said they plan to make significant changes to their asset mixes between now and 2011.

Among the funds planning big shifts, fewer than 15% said they plan to significantly increase their domestic equity allocations in the next three years and more than half are planning significant cuts, the press release said. Likewise, more than a quarter of these funds said they plan to make substantial cuts to international equity allocations, with less than 15% planning large increases.

Meanwhile, approximately 20% - 25% of pension funds said they plan to significantly increase their allocations to UK fixed interest, UK index-linked gilts, and corporate/credit bonds, and less than 10% of funds said they are planning significant cuts to any of these allocations.