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Editorial


Mark Dunne Editor


m.dunne@portfolio-institutional.co.uk


Pensions and equities: End of the affair


It’s official. The UK’s defined benefit (DB) schemes have fallen out of love with equities. Indeed, in the year to the end of June, trustees ditched their shares in publically-listed companies at a faster rate than in any year since Mercer started keeping records in 2003. That’s the headline finding of the consultancy’s latest asset allocation survey. Final salary schemes currently have, on average, 20% of their capital in publically-listed equities. This is a fall of 5% in 12 months and is well below the almost 70% recorded in 2003 - proof that there has been a big change in strategy among institutional investors.


The point is that many of the UK’s DB schemes are maturing and growth assets are considered risky. They are, therefore, being replaced by cash-generating investments. Such a radical re-think of how a portfolio should look is not just shaped by fears that the prolonged equity bull run is believed to be coming to an end with volatility returning to the markets in the past 18 months or so. Many schemes are looking to pass the responsibly for paying their current and former workers’ pen- sions to an insurer and so are de-risking their portfolios with that endgame in mind. Another driver is that 73% of schemes are not generating enough cash to pay all of their pensioners. Selling assets to raise the cash needed appears to be the most popular choice and shares trading in the world’s financial capitals, such as London and the US, should not be too difficult to sell quickly. So institutional investors are filling their portfolios with bonds (54%), which provide a steady and recurring income stream.


The capital from equities appears to have been recycled into alternative assets, which includes private equity, private debt, hedge funds and infrastructure among others. These alternatives to tradable bonds, listed equities and property account for 24% of UK final salary scheme portfolios, according to Mercer.


This could mean that pension schemes avoid the worst of any potential global slowdown that some commentators believe is on the way, unless there is a high level of defaults on debt as corporate prof- its come under pressure. Our cover story this month puts asset allocations in pension scheme portfolios under the microscope. Our coverage starts on page 28.


Issue 85 | June–July 2019 | portfolio institutional | 3


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