UK pensions cut equity exposure to an all-time low in 2014, which helped them achieve an average return of 11%, according to State Street.
Defined benefit (DB) pensions’ average equity allocation fell to 43% during the year, due to a combination of underperformance relative to fixed income and divestment from the asset class, as they considered de-risking more important.
State Street’s research into the UK DB universe showed that corporate plans have just a third of assets in equities, while allocations of government-backed pensions are much higher on average.
Jeanette Patrizio, senior vice president of State Street Investment Analytics, said the estimated 11% average performance from UK pensions brought five-year average returns to 9% a year, and 8% a year over 10 years.
Those funds with the highest exposure to bonds were among the top performers, State Street said, aided by a 20% return from index-linked assets and 18% from UK government bonds. In contrast, the UK equity market rallied towards the end of 2014 to finish the year up by just 1%.
Active management of equities served investors well in recent years: State Street’s research showed that in the previous four years to the end of 2013, active managers in the UK achieved “quite marked outperformance relative to the [FTSE] All Share index”. However, in 2014, the average equity fund tracked in line with the index.
Property exposure was 7.5% on average across all pensions, close to an all-time high, the research showed. Alternative assets made up roughly 10% of portfolios on average, and State Street said infrastructure investments took a greater chunk of this allocation during the year.
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