GREENWICH, Conn. - U.K. pension funds are becoming more conservative in their investment policies and less well-diversified, according to Greenwich Associates.
The growing influence of minimum solvency standards proposed by the U.K.'s Pension Law Review Committee a year ago and the growing maturity of British pen sion plans are causing many fund officials to increase their bond allocations, the consultant's annual survey of U.K. pension executives found.
In the next three years, U.K. fund officials expect the proportion of bonds will increase to 14.3% from 11.8%, an increase of more than 20%, according to Greenwich partner Rodger Smith.
Greenwich Associates found that the trend began in 1993, although it was masked by strong equity markets. Despite an 18% rise in British stock values, the proportion invested in U.K. stocks actually declined 1.7 percentage points to 44%.
But increases of 40% or higher in many continental European and emerging markets kept the total proportion allocated to equities at 78.5% this year.
There are good reasons for British funds to lower their stock allocations, the report said. The rise in the past 20 years in U.K. stock prices, going to an average price-earnings ratio of about 20 from 10, is unlikely to be duplicated.
In addition, U.K. funds are well funded, with an average solvency ratio of 113%.
Also, the aging workforce and growing numbers of retirees are shifting the asset/liability structure, making it more prudent to increase fixed-income allocations and better match the liability structure, according to Charles Ellis, managing partner.
The downside is that U.K. pension funds continue to decrease their diversification, with fewer funds investing in venture capital and real estate.
The percentage of U.K. funds investing in smaller-company stocks has dropped to 55% this year from 63% last year, and use of venture capital funds has been dropping since 1991 - when that market plunged.
Similarly, the proportion of pension funds investing in either U.K. or foreign real estate continues to decline. British pension executives expect to have only 5.7% invested in property in 1997, down 8% from 6.2% in 1994 and down 41% from the 9.6% reported in 1991. Greenwich consultants suggest pension executives should reexamine their attitudes toward this asset class.
On the other hand, increasing investment in emerging markets is offsetting some of the loss in diversification, the report noted.
In other areas, the report found:
Growth of defined contribution plans is much more limited than in the United States, but still is likely to spread. The minimum solvency standards might enhance this trend.
The report said 11% of funds surveyed use money purchase plans and 6% plan to add such plans. Total assets in such plans amount to only 4.5 billion, but that's up sharply from 1.2 billion in 1993.
Use of separate custodians continues to grow slowly, up to 33% from 27% of pension funds in 1991. About half of U.K. pension funds still use their external money managers for this task, while 18% do the work internally.
Independent trustees are used by 36% of funds this year, up from 31% in 1992. The trend has been aided by the Maxwell scandal.
Only 25% of pension funds use customized benchmarks for their balanced managers, although a far higher proportion use them for specialist managers.