Bond Allocations Hit Record High Despite Low Yields

UK pensions hiked their exposure to fixed income last year in the face of low—and in some cases negative—yields.

Bond allocations reached a record high last year among the pensions attached the UK’s biggest companies, research has shown.

FTSE 100 company pensions had a combined exposure of £315 billion ($448 billion) to fixed income at the end of the third quarter of 2015, according to consultants JLT Employee Benefits. This marked a £25 billion increase over the previous 12 months, and a rise in the average bond allocation to 59%.

“There is still a long way to go before the very significant risks still being run in pension schemes will cease to worry shareholders and members.”While returns from the asset class made up the bulk of the increase, JLT noted that the aggregate deficit across FTSE 100 pensions rose by more than 10% in the same period, as total liabilities rose by £23 billion to £614 billion.

“Despite some market commentators warning about bond overvaluation, the fact that pension bond holdings are at historical highs doesn’t seem to evidence it,” said Charles Cowling, director at JLT. However, the restricted upside for much of the fixed-income market is likely to “put more pressure on companies to fund pension scheme deficits through cash contributions,” he added.

Fathom Consulting and Pensions Insurance Corporation argued in a report published earlier this year that a higher equity allocation could be a better way to close funding gaps and de-risk, due to the current dynamics of the government bond markets.

Cowling, however, said higher bond exposure was “very positive” if it reflected “greater prudence” from pension trustees and investors.

“Some pension schemes’ allocations to equities are surprisingly high, although the information publicly available in their accounts does not reveal the rationale for their investment strategies,” Cowling added. “While it is good to see evidence of pension schemes reducing investment risk, there is still a long way to go before the very significant risks still being run in pension schemes will cease to worry shareholders and members alike.”

Almost all FTSE 100-listed companies have closed their defined benefit pensions to new members, and many are closed to existing members. Chemicals specialist Johnson Matthey and drinks company Diageo are believed to be the only two companies still accepting new employees into their pensions schemes, according to CIO research.

Last year, UK consultant firm Spence Johnson estimated that just £117 billion would be available for asset managers outside of the fixed income and liability-driven investment sectors.

Related: The DB Market Collapse for Asset Managers in Numbers & Adding Risk to De-risk