“The ‘cult of the equity' is history,” consultant Aon Hewitt said today as it released the UK findings of its Global Pensions Risk Survey 2013.

Despite long anticipation of a great rotation from fixed income back to equities, the findings show schemes continuing to reduce allocations, preferring bonds and alternatives as they seek refuge in diversification.

Aon Hewitt's senior partner in its Investment Consulting team John Belgrove, said: “The results of the survey provide more evidence of a structural shift in the UK pensions industry’s view of equities as the main source of portfolio growth. Despite an equity performance recovery of around 70 per cent from the low point of 2009, pension schemes continue to display a desire to move away from the asset class.”

Instead, schemes were focusing on risk management through hedging and diversification.

“The ‘cult of the equity' is history for defined benefit schemes,” he said.

Among the 220 UK schemes, with about £300bn in funds, 41 per cent expected to reduce exposure to UK equities this year, and 28 per cent planned to cut global equity allocations. Over the past 12 years, schemes’ average equity allocations have almost halved from nearly 80 per cent to 40 per cent, while bond allocations have more than doubled from 20 to over 40 per cent.

Appetite for both corporate bonds and alternatives – as well as derivative strategies and active asset allocation for bonds – was up.

“Trustees and sponsors continue to face a challenging investment environment and, due to the ongoing low level of gilt yields, they have also been tasked with coping with upwardly spiralling liabilities,” Belgrove said. “As the battle for deficit reduction intensifies, what we have seen is a growing focus on developing more sophisticated asset management strategies that aim to provide equity-like growth potential with bond-like volatility.”

Schemes with over £1bn of assets were most likely to look more widely for opportunities, with a net 37 per cent expecting to increase allocations to bonds over the next 12 months, and nearly half planning to boost alternative asset allocations.

The results suggested growing demand for diversified growth funds and even more use of derivatives, Belgrove added.

Other findings, however, also show demand for fiduciary management and delegated investment growing, particularly among smaller schemes. Of those with under £100m in assets, 20 per cent have already implemented full delegation of their investment policy, the survey found.

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