FTSE 100 DB schemes increase bond allocation

The aggregate FTSE 100 DB pension scheme allocation to bonds rose to 66 per cent, as of 30 June 2018, up from 63 per cent on 30 June 2017, JLT Employee Benefits has revealed.

The change in bond allocation was prompted by a £36bn improvement in the aggregate deficit during the same period, down to £1bn.

In just a decade, schemes’ investment strategies have shifted from equity-dominant to bond-dominant portfolios.

Ten years ago, schemes’ average bond allocation was 35 per cent, while 68 FTSE 100 companies now have more than 50 per cent of portfolio assets allocated to bonds.

Eight FTSE 100 companies, including Severn Trent, Legal & General and Ferguson, increased their scheme allocation to bonds by more than 10 per cent over the year.

Furthermore, 10 FTSE 100 schemes have more than 90 per cent of their assets invested in bonds, while only five companies have less than 25 per cent allocated to bonds.

In order to improve scheme funding, 51 FTSE 100 sponsors reported deficit funding contributions in their most recent annual reports and accounts.

A total of £14.3bn was paid into schemes during the year, £6.4bn more than the cost of benefits during the year, therefore representing £7.9bn towards reducing pension scheme deficits.

Commenting on the findings, JLT chief actuary, Charles Cowling said: “Pension schemes made good progress in 2018 and it is encouraging to see a significant improvement in funding levels and schemes’ proactive efforts to lock in gains.

“By moving into bonds, schemes are more closely mirroring the profile of liabilities arising, thereby reducing volatility in funding levels.

“Limiting volatility in pension schemes may prove crucial to UK companies over the next few months, a period which could bring untold challenges to even the largest, most resilient businesses.

“In the coming weeks and months, it will be important for trustees and their sponsors to batten down the hatches and ensure their scheme is positioned appropriately.

“For some, this may constitute a decision to take some risk off the table, while for others it may be case of building effective hedging strategies. Either way, in order protect the good progress of 2018, it is crucial that schemes remain alert to the situation as it evolves.”

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