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FTSE 100 DB pension schemes turn to bonds to lower investment risk

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FTSE 100 defined benefits (DB) pensions schemes are increasingly investing in bonds, reflecting a greater prudence in risk management towards their scheme deficits, according to research by JLT Employee Benefits (JLT). 

In its latest quarterly report, JLT found the average FTSE 100 pension scheme asset allocation to bonds has reached 61 per cent in the year to 31 December 2015. In monetary terms, this equates to a rise by circa GBP20 billion to a record GBP330 billion in the year to 31 December 2015. Six years ago, bond allocations stood at 50 per cent of their assets.

A number of companies reported very significant individual changes to investment strategies, with seven FTSE 100 companies changing their bond allocations by more than 10 per cent in the last twelve months. Standard Life is the latest company to report a big switch out of equities, with bond allocations increasing by 28 per cent. A total of 62 FTSE 100 companies have more than 50 per cent of pension scheme assets in bonds.

Charles Cowling (pictured), Director, JLT Employee Benefits, says: “It is promising to see the change in mindset of trustees. By demonstrating greater prudence, it will inspire more confidence from shareholders and members. We have seen a number of major British institutions facing significant difficulties with their pension liabilities recently, so this is an important step to take.

“What the FTSE 100 pension schemes need, however, are cash contributions that will feed their current deficits. If there can be some momentum gained via the markets, that does not reverse when interest rates eventually rise, there could be some scope to turn things around. But there is a long way to go before the very significant risks still being run in pension schemes will cease to worry shareholders and pension scheme members.”

Overall, FTSE 100 companies are looking for lower risk investment strategies at a time when they are struggling to keep up with contributions to plug their pension scheme deficits. Despite the total deficit of FTSE 100 companies dropping to GBP70 billion from GBP82 billion 12 months ago, contributions have fallen by GBP0.6 billion in the same period. Less than one third (29) of companies are currently disclosing a surplus and 58 continue to report deficits of their DB pensions schemes.

Cowling adds: “The option of bond holdings may also be a luxury for a limited number of the FTSE 100. JLT’s data shows that it is only the most well-funded pension schemes who have been able to take advantage of a low risk strategy, with the ten best funded schemes holding an average of 80 per cent of bond investments compared to an average of less than 30 per cent held by the worst-funded schemes.

“There remain significant concerns around those who cannot opt for bond-focused investment strategies – and these schemes are often the ones with the most to lose. With lower assets to back up a higher-risk, equity strategy, a number of FTSE 100 companies are still gambling in the investment casino, to try to keep on top of their deficit contributions.

“With interest rates at an all-time low and further uncertainty ahead of the EU Referendum, pension schemes continue to represent a material risk to a number of FTSE 100 businesses. Ten FTSE 100 companies have total disclosed pension liabilities greater than their equity market value.”           

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