BLOG: A look back at pension fund asset allocation over 50 years

Written by Natalie Tuck

In the global, modern world that we live in, it is second nature for pension funds to spread their investments across a range of different assets.

The most recent data for UBS’ Pension Fund Indicators 2017 reveals that in 2016 pension funds diversified their assets across UK equities (16%), overseas equities (29%), UK fixed income (21%), overseas fixed income (5%), index-linked gilts (11%), cash (2%), real estate (8%) and alternatives (9%).

This wasn’t always the case, however. A look back over 50 years to 1966, a year in which England conquered the world, at least at football, reveals startlingly different asset class weightings. Funds were much more domestic in their weightings with exposure to UK equities (43%) and UK fixed income (49%) forming the majority of the portfolio. The remaining 8 per cent of the portfolio was invested in real estate (5%), cash (2%) and overseas equities (1%).

According to the report, index-linked gilts did not form part of a pension funds’ portfolio until 1981, when the asset made up 2% of the portfolio. This was followed by overseas fixed income in 1984 (1%) and alternatives in 1996 (1%).

Weighting in UK fixed income fell from 49% in 1966 to a low of 4% in 1993, which the report notes was partly due to a substitution towards index-linked gilts, and overseas bonds. Another reason for the decline was the fall in the size of the gilt market relative to the equity market.
But what does the future hold?

Charles Stanley Asset Management senior portfolio manager Bob Campion thinks that UK pension funds will continue along the path towards greater global diversification. “While the weighting towards UK assets has reduced significantly over the last 50 years, there is still a noticeable home bias in asset allocations which I would expect to diminish over time.

“But as DB pension schemes mature, I would also expect a significant shift from return-seeking assets such as global equities towards liability matching assets. In 50 years’ time the vast majority of private sector DB schemes will have a long-tail of residual pensioner liabilities which I would expect to be almost entirely matched by gilt-based assets.”

Royal London investment proposition manager Ryan Medlock added: “The biggest challenge is that the more traditional asset classes are increasingly becoming more and more closely correlated. In order to combat this we’re likely to see further diversification over the next 50 years in an effort to make portfolios more resilient to market shocks. This could mean a greater allocation to alternatives, the emergence of new strategies and a greater focus on ‘global’ investments.”

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