Over half of all UK defined benefit (DB) schemes have reduced their investment in equities over the last two years while diversifying into alternative growth assets, according to Aon.
Much has changed for UK DB schemes since the financial crisis, the firm's biennial Global Pension Risk Survey finds. It noted this reflects an over-riding trend of the industry in response to rising costs, with most schemes setting their sights on the long term.
Partner Emily McGuire noted that, ten years ago, equities were typically 50% of a scheme's investment portfolio.
"That's changed with allocations now far lower and with 40% of respondents expecting to reduce that figure further over the next year," she said. "Nevertheless, they still need to maintain investment returns in their portfolio, which is where the increased use of alternative growth assets comes in."
Some of the overall themes in the survey cover maturing pension schemes with many reducing the time in which they expect to reach long-term targets.
Furthermore, over the last 12 months, allocations to riskier asset classes, such as equities, have reduced and 40% of survey respondents said they plan to do so over the next year.
At the same time, respondents plan to increase investment in risk-reducing assets such as liability-driven investment (LDI) (up 50%) and gilts (up around 30%). There has also been an increase in asset classes that can be used as part of cashflow-matching portfolios, such as corporate bonds (31%) and certain illiquid assets (23%).
Most DB schemes are discussing the merits of liquid versus illiquid approaches in the context of their endgame investment strategy. A significant portion (40%) plans to look at bulk annuities in the near term, with a third expecting purchases over the next 12 months. Overall, the average timescale to reach long-term targets has fallen by 1.7 years since 2017, now sitting at 9.4 years. There was also a material increase in the adoption of buyout targets, rising from 27% to 35%.
Almost a quarter of respondents (23%) said they expect to increase or make allocations to a variety of less liquid assets, but this does come with some challenges. A third (33%) do not think illiquid assets offer attractive risk-adjusted returns compared to liquid markets, while around a fifth (22%) blamed inaction on a lack of resources or expertise in this area.
The greatest interest is in private credit (47%), including direct lending to corporates, real estate debt, and infrastructure debt.
Further, the number of schemes hedged with less than 60% of liabilities hedged has halved over the two years, with nearly half of schemes hedging over 80% of their interest rate risk and just under a third (30%) hedging less than 60%.
Attitudes to delegated investment continues to move towards giving advisers more, but limited, investment functions. Delegation of tasks range from manager monitoring (63%) to fully delegated mandates (33%). Partial fiduciary management was the most popular response with 30% of schemes using it and another 20% considering it within a year.
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