UK - Total pension assets in corporate bonds is expected to increase as the FRS17 accounting standard takes effect, according to Charles McKenzie, fixed income manager at Deutsche Asset Management (DeAM).
With total assets of about £3.5bn in corporate bonds, DeAM noted that UK pension funds in particular are allocating more to 15 year maturity gilts.
The firm also found that corporate bonds outperformed 3% over the last 12 months.
“In 1997 pension funds began to increase their investment in gilts and lately have invested more in corporate bonds,” said McKenzie.
McKenzie highlighted the decision of the Boots Pension Scheme to move all its assets from assets to bonds.
“Boots was very extreme in its switch to bonds but this was done to immunise their liabilities,” he said.
“The mature pension schemes tend put more into bonds and Boots decided they would have more security from investing in AAA bonds.”
McKenzie explained that FRS 17 ruled that the AA corporate bond is to be viewed as the standard for matching assets and liabilities, hence its popularity. Although corporate bond investing is expected to increase, McKenzie warned that pension funds should realise that the global economy is declining rapidly and the corporates are also experiencing financial difficulty.
“Pension funds should be aware that they are relying on companies to pay you back and, because of the recent market downturn, you may be at risk.”
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