Survey: UK Schemes Drop Equity Holdings, Focus on Liabilities

(October 25, 2011) — UK schemes are focusing on equity performance risk despite reducing their allocations to the asset class, according to new research by Bluefin Corporate Consulting.

According to the firm, the average equity holdings among UK schemes total slightly more than 40%, and the firm believes this percentage may soon drop further. The firm noted the main threats to pension scheme funding were perceived (almost equally) as being equity performance, long term interest rates, and inflation, reflecting a growing recognition of the importance of liabilities in comparison.

The survey — titled “Taking your pension pulse – Do you pass the test?” — aimed to determine what controls and tools trustees had in place to help them weather difficult market environments. “Some multi million pound funds still have no mechanism to monitor and react to violent movements in assets or liability values outside of the valuation and annual update process,” the survey noted.

Commenting on the results of the research, Bluefin consultant Adrian Chapman said: “The most surprising result of the survey was that some large funds told us they had no mechanisms to monitor and react to violent movements in assets or liability values outside the valuation and annual update process…In addition, since this survey was carried out in June, we believe that since then the average equity holding may have fallen as low as 35%.”

The majority of meetings for the research took place in June 2011 and covered 45 schemes.

The survey by Bluefin revealing declining allocations to equities among UK schemes contrasts with a recent quarterly survey by Northern Trust that revealed institutional investment managers in the US actually see value in the US equity market, despite pessimism about the economy.

The study showed that the European debt crisis is perceived to be the biggest risk to equity markets in the next six months. A total of 63% of managers anticipate the European debt crisis will spill over to other areas of the market. Furthermore, the study showed that while 39% of managers expect corporate earnings to decline in the fourth quarter of 2011 compared to 15% last quarter, 36% of managers expect US GDP growth to decelerate over the next six months, up from 21% in the second quarter. Northern Trust also revealed that investors are holding onto cash, with 23% holding a higher-than-normal level of cash in the third quarter, up from 12% in the previous quarter.