Even among the top three funds, the asset allocation strategies differ markedly. For example, while USS has more than 50% invested in traditional equities, both BT and Lloyds hold less than 40% of their total assets in equities, according to the survey. In terms of traditional fixed income, USS has less than 20% of its total assets invested in the asset class, while both BT and Lloyds have about 40% allocated, according to the survey.
In general, corporate pension funds tend to hold more traditional fixed income, partly because of adopting liability-driven investing strategies. The £4.6 billion Boots Pension Scheme, Nottingham, England, which is among the pioneers of LDI in the U.K., invested about 85% of its total assets in fixed income. Others with a fixed-income exposure of 80% or higher as of June 30 include: Rolls-Royce PLC pension schemes, London, which had combined assets of about £9.6 billion; the £8.6 billion Imperial Chemical Industries Ltd. Pension Fund, London; Prudential PLC pension schemes, London, which had combined assets of about £7.2 billion; RSA Group PLC pension schemes, London, which had total assets of about £5.5 billion; and Invensys PLC pension schemes, London, which had combined assets of about £4.3 billion.
However not all corporate pension funds are reducing risk. Among the most prominent example is the £15.6 billion BP Pension Scheme, London. The pension fund has a 61% exposure to listed equities, 17% allocation to fixed income and 7% invested in property. About 11% is invested in private equity, and there's no dedicated target allocation to hedge funds.
“The investment policy is designed to reflect the maturity of the fund and levels of risk that the sponsor can sustain,” said Sally Bridgeland, CEO of BP Pension Trustees Ltd., London. “With a large sponsor and with liabilities which are less mature than most, the fund is still a long-term investor and the risk tolerance can be higher.”
The dispersion in asset allocation trends among the U.K.'s 50 largest pension funds is widening, consultants said. The allocation to equities, for example, ranged from less than 5% of total assets for Invensys to 83% of the portfolio at The Northern Ireland Local Government Officers' Superannuation Committee, Belfast, which had about £4 billion in assets as of June 30, according to the survey.
“There's a much wider range of investment strategies adopted by pension schemes, which reflects the different circumstances of the schemes,” said Phil Edwards, principal within Mercer's investment consulting business based in Bristol, England.
“Investors have started to use a slightly different lens to think about asset allocation strategies,” Mr. Edwards added. Beyond asset classes, risk factors and return drivers are playing a larger role in asset allocation. Despite having gone “a long way in terms of diversification, most schemes still find that the biggest driver of returns is equity risk.”
The range of pension fund allocations to traditional fixed income is similarly as wide as it is in equities, with the £5.1 billion Merseyside Pension Fund, Liverpool, and the Northern Ireland Local Government Officers' fund each holding less than 10% of their total assets in traditional fixed income. The Rolls-Royce pension scheme has an 88.5% exposure to traditional fixed income.
Overall market movements will likely drive the balance between the allocation to bonds and return-seeking assets in the next one to three years, consultants said. “If equity markets rise, that will allow pension schemes to reduce equity exposures — and reduce risk. If bond yields rise, that will likely increase the level of interest-rate hedging undertaken by schemes,” Mr. Edwards said.
Allocations to alternatives were also mixed among the top 50 funds. While many had almost no exposure in alternatives, a few targeted more than 20% of the total portfolio toward hedge funds, private equity and other alternatives.