Schemes shift from equities to bonds, hedge funds and cash, says regulator

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5 Nov 2013

UK schemes have reduced their allocations to equities and increased holdings of bonds, cash and hedge funds, according to the latest edition of the Purple Book.

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UK schemes have reduced their allocations to equities and increased holdings of bonds, cash and hedge funds, according to the latest edition of the Purple Book.

UK schemes have reduced their allocations to equities and increased holdings of bonds, cash and hedge funds, according to the latest edition of the Purple Book.

The annual book, published by The Pensions Regulator (TPR) and Pensions Protection Fund (PPF) and now in its eighth year, revealed allocations to equity fell from 38.5% in 2012 to 35.1% over the last 12 months. It also found a continued shift from UK equities to overseas equities and an increase in holdings of unquoted equities.

Meanwhile, allocations to gilts and fixed interest increased from 43.2% to 44.8%, with the publication revealing a fall in corporate bond and a rise in government bond allocation for the first time since 2008.

Meanwhile, investment in hedge funds increased from 4.5% to 5.2% and cash deposits have almost tripled since 2007 to 6.7%. Allocations to property fell from 4.9% to 4.7%.

The Purple book also reported improvements in the economic environment since the end of March 2013, with gilt yields rising sharply and equity markets remaining broadly unchanged. This resulted in scheme funding improving from 84% in March to 93% today.

PPF executive director for financial risk Martin Clarke said: Purple provides us with an invaluable barometer about the changes in risk we face as we seek to hit our target of becoming financially self-sufficient by 2030. We are seeing some green shoots of improvement in scheme funding but risk remains high as we are in uncharted territory.

“However, we believe that our funding strategy continues to be appropriate and we are making good progress to meeting our funding aim. But, we live in uncertain times so keeping a close watch on our financial position remains critical to our future success.”

The Pensions Regulator’s interim executive director for DB regulation, Geoff Cruickshank (pictured), added: “Defined benefit schemes make up a sizable part of the pensions landscape and will continue to pay retirement incomes to millions of people for decades to come. The Purple Book provides the most comprehensive and in-depth view available of developments and risks in this area.

“We will shortly be consulting on our revised DB funding code of practice and regulatory strategy, providing pension trustees with additional guidance on managing the different risks in their scheme so that members receive their promised benefits.”

TOP 10 PURPLE BOOK HIGHLIGHTS:

1. The aggregate s179 funding position of eligible schemes at 31 March 2013 was a deficit of £210.8bn.

2. Since the end of the financial crisis, the insolvency rate among sponsoring employers of eligible schemes fell below pre-crisis levels while national insolvency rate remains above pre-crisis levels.

3. Schemes continue to de-risk as asset allocation trends continue, including a falling proportion of equity and a rise in the proportion of gilts and fixed income.

4. Average asset allocations of UK equities is smaller than allocations of overseas equities for the first time since 2008.

5. In 2012/13, the number of schemes paying no risk based levy represented 19% of total schemes, compared to five per cent for 2011/12 – a direct result of the introduction of new levy formula.

6. Investment risk taken into account for the first time when calculating the levy for 2013/14 – 365 schemes performed bespoke tests, 257 carried out voluntary tests and 5,528 schemes followed standard test methodology.

7. There was a reduction in long-term risk to the fund during 2012/13, largely a result of an improvement in the PPF’s own funding level during the same period.

8. In 2012/13, the PPF made compensation payments of £331.8m compared to £203.1m in 2011/12.

9. Total number of contingent assets in place for the 2013/14 levy year was about 830, slightly less than 2012/13, a result of firmer standards of validation introduced by the PPF.

10. Eligible schemes had, by April 2013, certified about £28.5bn of deficit reduction contributions to reduce deficits for the 2013/14 levy year

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