A tendency to overallocate to domestic equities caused the defined benefit plans of the U.K.'s FTSE 350 companies to suffer in 2014, said Goldman Sachs Asset Management.
In its latest global portfolio outlook paper, GSAM said the funded level for the pension funds of FTSE 350 companies declined by three percentage points in the year ended Dec. 31 to an average 94%. That decline corresponded to an aggregate increase in deficits of 91.6%, to £18.2 billion ($28.3 billion), over the same period.
GSAM attributed the fall to three things: the increase in liability values, driven by a drop in interest rates in 2014; asset allocation biases; and increased funded level volatility.
On average, the pension funds had a one-third allocation to U.K. equities, a significant overweight relative to the U.K.'s contribution to global market capitalization of 7%, said GSAM in the paper. That hurt returns in particular in 2014, when U.K. equities returned 0.7% over the year, it said.
“We estimate that a combination of schemes overallocating to domestic equities and the underperformance of U.K. equities relative to global equities over 2014 cost U.K. schemes around two percentage points of portfolio performance on average last year,” wrote GSAM in the paper.
The money manager found that a disparity between the overall equity allocations of pension funds that have less than £100 million of assets, and those with more than £5 billion. The smaller end of the scale typically allocated 47% to equities, vs. 32% for the larger pension funds. That compared with a 20-percentage-point difference in 2013.
GSAM estimated the differences in allocation, plus the decline in interest rates over 2014, led to underperformance of smaller FTSE 350 company pension funds vs. larger pension funds. Total asset returns for smaller pension funds were nearly two percentage points lower than larger pension funds.