| Pension assets may tilt in favour of fixed income |
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| 04/02/2007 | |
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Corporate pension assets, which have been shifting in favour of equities in the last decade, may reverse course, according to a Watson Wyatt survey. Pension funds now have an average global allocation of 60% in equities, 26% in bonds and 14% in other asset classes, half of which is in cash and the balance in alternatives. That compares to a 51% weighting in equities, 36.5% in bonds and 11.9% in other asset classes a decade earlier. The study anticipates that the overweighting in equities will likely level off and grow in fixed-income as corporate schemes have seen an improvement in their funding positions. Using an asset-liability indicator, the study found a negative year-to-year change each year from 2000-2003, though the indicator spiked 23.2% in 2003. It was relatively flat in 2004, surged 9.8% in 2005 and 4.9% in 2006, resulting in a "marked improvement in the balance sheet position at the country level." At the end of 2006 "there has been growth in bond allocations in the UK as the de-risking agenda has become more pronounced given the increasing maturity of many funds and the greater impact of mark-to-market accounting and tighter regulatory constraints. This change will surely take time to register. Switzerland, for example, has seen a steady and continuous increase in its equity allocation from 16% in 1996 to 38% in 2006 and it is too early into the year to know which way Swiss schemes will go with their allocations. The Anglo-Saxon countries – The United States, the United Kingdom, Canada and Australia-- had the highest allocation to equities at the end of 2006: 63.5%, 67.8%, 54.4% and 59%, respectively. Meanwhile, the study identified key trends in pension funds investments, including increased use of ALM and Liability-Driven Investment approaches, in addition to increased use of absolute return mandates. In other findings, eleven countries saw their pension assets grow at a compound annual rate of 7.5% in the last decade, lifting them on average to 81% of GDP from 58% a decade earlier. Switzerland saw the biggest increase as a percentage of GDP and Germany the lowest. In dollar terms, assets more than doubled from $11.2tr in 1996 to $23.2tr at the end of 2006, according to the survey. The pension fund assets of the United States, Japan and the United Kingdom represented 85% of the total in both 1996 and 2006, while the US alone represented nearly 60% of global assets, excluding IRAs. The survey covered 11 markets in total with the largest corporate pension schemes. In the last decade, Ireland and Australia had the highest growth rates when assets were measured in absolute terms, growing at 16% and 14.6% respectively in part due to mandatory defined contributions in Australia and the establishment of the National Pensions Reserve Fund in Ireland. Meanwhile, Germany and Japan had the lowest growth rates. VB |
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