UK Pensions Slow Risk-Reduction as Funding Levels Improve

Defined benefit corporate pension funds in the UK have taken their foot off the risk-reduction pedal in 2014, as funding levels have improved and the country’s economy has strengthened its recovery.

The annual Purple Book, published today by the UK’s Pensions Regulator and Pension Protection Fund (PPF), showed for only the second time in nine years that institutional investors had lowered their allocations to fixed income—from 44.8% last year to 44.1% in 2014.

At the same time, investors pulled back on discarding equity holdings—a trend that had been prevalent since the onset of the financial crisis—as the UK economy has seemingly recovered.

“The Purple Book has shown a slowdown in de-risking, demonstrating that the steady decline has levelled off and could point to the end of a long-term trend,” said Andrew McKinnon, the PPF’s CFO.

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news. 

The PPF acts as a lifeboat for defined benefit pension funds attached to bankrupt companies in the UK. It monitors the health of the nation’s pensions and applies a levy to those who may end up relying upon it.

The Purple Book revealed funding levels in the UK corporate pension sector had improved from 84% in 2013 to 97% this year. On a full buy-out basis, however, this level was a great deal less, although it had improved from 61% to 67% over the past year.

“Whilst there has been a marked improvement in scheme funding, risks do still remain and we are confident that our funding strategy continues to be appropriate to ensure the protection of our members,” said McKinnon.

More detailed data published by the PPF and regulator showed schemes that carried out a bespoke stress test reported lower investment risk year-on-year.

Asset allocation reports showed that, for the first time in nine years, overseas equity holdings were more than double those held in UK securities.

The PPF invests the assets it collects from schemes it takes on from bankrupt companies along with the levy payments collected from eligible schemes. It intends to be self-sufficient and demand no further levy payments by 2030.

For an in depth look at de-risking—or lack of it—sign up for CIO’s latest edition, published November 10.

Investor activism is here to stay, but it will be spearheaded by hedge funds rather than pension investors, according to a survey from law firm Schulte Roth & Zabel (SRZ).

The study found a staggering 98% of US activist and corporate respondents said they expect activism to increase over the next 12 to 24 months, 48% of whom said the bump would be substantial.

“As long as activists can continue to deliver alpha returns, there is no reason to expect this trend to recede,” said Marc Weingarten and David Rosewater, co-heads of SRZ’s activism practice.

“If it takes less time for the companies to respond to activist demands with appropriate changes… logically, holding periods would fall in response.”—David Rosewater, SRZAbout 60% of respondents said hedge funds would lead activist campaigns over the next 12 months while only 10% voted pension funds would see an increase.

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news. 

In the US, activist shareholders said they were mainly driven by financial performance, acquisition announcements, and management/board changes. Some 70% stated their preference for passive approach such as open dialogues and negotiations with management and shareholder resolutions in achieving their goals.

Unlike high profile activist operations the likes of Carl Icahn with eBay and Dan Loeb with auction house Sotheby’s, only 4% said they believed publicity campaigns were effective.

SRZ’s study also found investment holding periods have shortened since last year, possibly due to activists’ rising success at a faster pace.

According to the survey, only 36% of US activists said they have an average holding period of at least 12 months, significantly lower than the 60% recorded in 2013. About 50% of respondents said they hold investments for an average of six to 12 months.

“If it takes less time for the companies to respond to activist demands with appropriate changes and those changes then are reflected more quickly in the stock price, logically, holding periods would fall in response,” Rosewater said.

But a surge in activism popularity may come at a cost to profits. The survey found investors lowered their target returns on activist investments significantly since last year.

Eighty percent of respondents said they expected returns of 10% to 20% while only 20% said they projected a 20% to 30% yield. Two years ago, the results were roughly split down the middle.

More than 50% of this year’s respondents also said they expect “overcrowding” in activist activity that would limit the number of opportunities.

Related Content: Activists Post Strong Returns, But at a Price