Defined benefit pension schemes reduce exposure to equities

Defined benefit (DB) pension schemes are relying less on equities for generating growth, according to research by Aon Hewitt.

The UK findings of the consultancy’s Global pension risk survey 2013, which questioned more than 240 DB pension schemes representing around £300 billion in assets, showed that 41% of respondents expect to reduce their exposure to UK equities, with 28% planning a reduction in allocations to global equities in 2013.

However, some respondents see equities as a buying opportunity, indicating the traffic is not all one-way.

The research also revealed: 

  • The average equity allocations in pension schemes have dropped from 80% in 2009 to 40% in 2013.
  • Bond allocations have increased from around 20% in 2009 to more than 40% in 2013.
  • A third of respondents are planning to increase their exposure to alternatives, while a similar number are increasing derivative strategies and looking to grow their active asset allocation.
  • 37% of schemes with more than £1 billion of assets are expecting to increase their portfolio allocation to bonds over the next year.
  • In the same period, nearly half the schemes of this size are planning to grow their alternative asset holdings as they work towards self-sufficiency.
  • 20% of schemes with less than £100 million of assets have implemented full delegation of their investment policy.
  • Almost 50% of respondents have already implemented asset manager monitoring or are very likely to delegate it to a third party.

John Belgrove, senior partner in the investment consulting team at Aon Hewitt (pictured), said: “The results of the survey provide more evidence of a structural shift in the UK pensions industry’s view of equities as the main source of portfolio growth.

“While equities will continue to play an important role in scheme portfolios, the focus for the future is on risk management through hedging and diversification. The ‘cult of the equity’ is history for defined benefit pension schemes.”