Almost a third of U.K. pension funds reallocated about 5% of their portfolios in 2006, with many moving to alternative investments from equities to rein in volatility, according to an Aon Consulting survey.
Because bonds are relatively expensive and yields has been relatively low, many pension funds prefer to diversify their growth assets rather than switch into bonds, Paul McGlone, principal and senior actuary at Aon, said in a telephone interview. In 2006, 14% of the funds surveyed said they have invested in alternatives as a way to better control their risk budgets while maintaining the higher potential for excess returns. Of that 14%, half of them reallocated assets into real estate and 17% opted for absolute-return strategies including hedge funds. Another 11% favored global tactical asset allocation as a diversification tool.
The switch reflects a pension market in which more plans are closed to either new members or new accruals, Mr. McGlone said. About 60% of the funds surveyed were closed to new members and another 14% were closed to new members and accruals.
The survey was conducted between November 2006 and February 2007, and included 150 U.K. companies that operate defined benefit plans.