UK pension schemes' average allocation to bonds has risen to over 50% for the first time according to The Pension Protection Fund's (PPF's) Purple Book.
At the end of March 2016 average bond allocations stood at 51.3%. This is up from 47.7% at the end of March 2015.
The proportion invested in equities fell from 33.0% to 30.3%, reflecting schemes' desire to de-risk. Within scheme equity allocations the proportion allocated to UK-quoted equities fell from 25.6% to 22.4% in 2016 while the overseas share increased from 65.4% to 68.6%.
The proportion invested in instruments other than bonds or equities fell from 19.3% in 2015 to 18.4%. Despite this the proportion invested in hedge funds rose for the seventh successive time and stands at 6.6%.
The data showed that larger schemes tend to hold more in overseas equities and index-linked securities rather than UK equities and conventional government bonds.
Other key findings from the report showed that the percentage of schemes closed to future accrual continued to rise in 2016 from 34% to 35%. The percentage of schemes that remained open stayed at 13%.
Scheme funding improved between the end of March 2015 and March 2016. Aggregate deficits on an s.179 level fell from £244.2bn to £221.7bn. The aggregate funding ratio rose from 84.2% to 85.8%. This was due to the impact of using new valuations which more than offset the adverse effects of lower gilt yields and equity markets.
Commenting on the findings, PPF chief financial officer Andrew McKinnon said: "2016 has been an interesting year for defined benefit (DB) pensions. While scheme funding remained largely stable in the year to March, there have been large swings in funding since June. When we look back at what progress schemes have made over the last decade it appears that many schemes are just treading water. The average recovery plan length, at around eight years, has barely improved, which brings home the challenge we now face."
Hymans Robertson's head of trustee consulting Calum Cooper warned that the increase in scheme closures would lead to more schemes becoming cashflow negative.
"Increasing numbers of scheme closures push more into a position where they have less cash coming in through contributions than they have going out in pension payments - i.e. they become cashflow negative," he said.
"Our recent analysis of FTSE350 DB schemes revealed that 57% are now in this territory with schemes paying out £20bn p.a. and this is anticipated to rise to £100bn within 10 years. The combination of scheme's closing and more people cashing in DB benefits post Freedom and Choice has outweighed the increase in the amount of cash companies have put in to their DB schemes over the year.
"We expect the number of schemes that are in this position to be much higher next year as the increasing trend of scheme closures, people cashing in DB pensions and the maturing of pension schemes unfolds. The need to manage cashflow risk and uncertainty - rather than a myopic focus on balance sheet deficits and discount rates - has never been greater.
The Purple Book 2016 is based on new scheme returns for a dataset of 5,794 DB schemes. This covers 10.9 million members and represents virtually all PPF-eligible schemes and universe liabilities.
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