According to BNY Mellon, allocation to Other Assets increased during 2007 from 0.8% to 1.6%, reflecting the greater number of pension funds investing in alternatives, particularly Hedge Funds and Private Equity. However, the overall allocation remains relatively low with just one in eight pension funds investing in Other Assets and the typical commitment being around 6% of assets.
Commenting on the changing asset allocation trends, Alan Wilcock, Performance and Risk Analytics Director at BNY Mellon Asset Servicing, said: "While UK Equities has been declining as a major asset class for UK pension funds over the last few years, 2007 saw the largest fall to date. UK Bond allocations, including Index-Linked, now exceed UK Equities for the first time ever."
Fifth consecutive year of positive performance
The weighted average return for UK pension funds for 2007 was 6.4%. This is the fifth consecutive year of positive performance, following the poor performance at the start of the decade. Over the last five years UK pension funds have averaged 12.1% per annum, which represents a real rate of return of 8.7% per annum against the Retail Prices Index and 8.2% per annum against earnings.
Over 10 years, pension fund returns have averaged 6.5% per annum, a return of 3.7% per annum in excess of price inflation.
The fund median in 2007 was 6.0% indicating that larger funds produced slightly higher returns on average compared to smaller funds over 2007. Historically, larger funds have benefited from higher weightings in Property, although this was not the case during 2007 when this sector returned -5.2%. However, larger funds did benefit from having higher weightings in key sectors such as Emerging Market Equities and Index-Linked Gilts, for which the median fund returned 39.1% and 8.6% respectively over the year.
2008 - a rollercoaster year for pension funds?
Despite the relatively turbulent market conditions since the summer of 2007, UK pension funds continued to enjoy low return volatility for periods to the end of 2007. According to BNY Mellon, 80% of schemes have seen volatility, as measured by the standard deviation, of between 5.1% per annum and 7.8% per annum over the last five years. These rates were historically very low, potentially leading investors to a have a greater sense of security than had been the case historically.
Tracking errors for pension funds relative to their scheme specific benchmarks were also historically low ranging from 0.6% to 1.8% per annum, again for 80% of schemes in the survey.
Commenting on the importance of risk, Wilcock added: "Pension funds have become accustomed to very low standard deviations and positive returns year on year. However, since the turn of the year, equity markets have fallen and this is likely to have increased both volatility and tracking error statistics. Against this background, risk management will no doubt be a critical element of any scheme's asset allocation strategy."
