UK Pensions Slow Risk-Reduction as Funding Levels Improve

Fixed income allocations are down as UK pension funds gain stability.

Defined benefit corporate pension funds in the UK have taken their foot off the risk-reduction pedal in 2014, as funding levels have improved and the country’s economy has strengthened its recovery.

The annual Purple Book, published today by the UK’s Pensions Regulator and Pension Protection Fund (PPF), showed for only the second time in nine years that institutional investors had lowered their allocations to fixed income—from 44.8% last year to 44.1% in 2014.

At the same time, investors pulled back on discarding equity holdings—a trend that had been prevalent since the onset of the financial crisis—as the UK economy has seemingly recovered.

“The Purple Book has shown a slowdown in de-risking, demonstrating that the steady decline has levelled off and could point to the end of a long-term trend,” said Andrew McKinnon, the PPF’s CFO.

The PPF acts as a lifeboat for defined benefit pension funds attached to bankrupt companies in the UK. It monitors the health of the nation’s pensions and applies a levy to those who may end up relying upon it.

The Purple Book revealed funding levels in the UK corporate pension sector had improved from 84% in 2013 to 97% this year. On a full buy-out basis, however, this level was a great deal less, although it had improved from 61% to 67% over the past year.

“Whilst there has been a marked improvement in scheme funding, risks do still remain and we are confident that our funding strategy continues to be appropriate to ensure the protection of our members,” said McKinnon.

More detailed data published by the PPF and regulator showed schemes that carried out a bespoke stress test reported lower investment risk year-on-year.

Asset allocation reports showed that, for the first time in nine years, overseas equity holdings were more than double those held in UK securities.

The PPF invests the assets it collects from schemes it takes on from bankrupt companies along with the levy payments collected from eligible schemes. It intends to be self-sufficient and demand no further levy payments by 2030.

For an in depth look at de-risking—or lack of it—sign up for CIO’s latest edition, published November 10.

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