Pension funds shift from equities to bonds and ‘alternative’ funds

Almost a third of pension funds (30%) have reallocated over 5% of their investment portfolio during 2006 to bonds, according to research by Aon Consulting.

Its UK Employers Operating Defined Benefit Schemes survey, reveals that sponsoring employers and trustees have adopted a more diverse and risk-controlled investment strategies in the face of increased volatility in the markets over 2006.

The survey undertaken between November 2006 and February 2007, showed that 14% of pension funds have invested to diversify their growth assets over the past year, with the intention of reducing their exposure to a single volatile asset class.

The greatest shift in†2006 was in relation to property with 50% of schemes†diversifying growth assets using this asset class. The survey also showed that absolute return vehicles such as hedge funds (17%) and global tactical asset allocation (11%) are also becoming popular forms of growth investments.

Paul McGlone, principal and senior actuary at Aon Consulting, said: "The improved investment returns achieved by most schemes in recent years is going some way to alleviating the rising deficit levels experienced by almost all pension funds during the last decade. However, while most trustees and employers still believe that equity returns should outperform other asset classes over the long term, many find themselves in a shorter term game. For those not wanting to give up long term return, diversified growth assets offer one option. Interest in wider asset classes has accelerated and is expected to build on this over the next 12 months."

Of the 150 companies surveyed, 26.5% operated defined benefit pension†schemes that were open to new members and accrual; 59.1% operated schemes that were closed to new members but continued to accrue benefits and 14.4% operated schemes that were closed to new members.