Schemes move into property and hedge funds as interest in wider asset classes and absolute returns picks up
Diversification drove half of all pension schemes to invest in property last year, with almost a fifth diversifying into hedge funds.
According to research by Aon Consulting, 30% of schemes have also shifted 5% of their portfolios from equities to bonds.
Half of all pension schemes have diversified by investing in property while desire for absolute returns saw 17% of schemes invest in hedge funds and 11% in global tactical asset allocation vehicles.
According to Paul McGlone, principal and senior actuary at Aon Consulting, interest in wider asset classes has accelerated and is expected to build over the next 12 months.
Increased volatility in markets last year and a continued focus on bond yields has also meant many UK employers that sponsor defined benefit schemes are looking at how assets relate to a scheme's liabilities.
Around a tenth of employers said their schemes have adopted some form of liability driven investment (LDI) strategy in the past 12 months.
However, despite recent market volatility, substantial falls in pension fund deficits last year should benefit many companies' annual accounts.
With around a quarter of UK companies about to reach their accounting year end, the fall in scheme deficits should mean a substantial improvement in the balance sheet item arising from pension scheme deficits.
According to Aon, the deficit for the top 200 largest pension funds has improved by £19bn over the past year, having fallen from £48bn on 31 March 2006 to £29bn at close of business on 23 March this year. The £19bn improvement in balance sheet deficits is largely driven by increases in bond yields and strong investment performance.
For 2007, the use of contingent assets for scheme funding could have the biggest impact on the industry, according to McGlone.
A sixth of schemes in the survey said they are already using such assets in their portfolios, with another 20% considering them.
Parent companies and group guarantees are the most popular form of contingent funding being implemented, with escrow accounts, charge over assets and letters of credit being the next most popular considerations.
The implementation of such LDI strategies remains somewhat limited because of the perceived cost, according to McGlone, while the use of contingent assets is growing quickly, he added. While such assets do not generally remove risk from the employer they can help to manage volatility.
The research surveyed 150 UK companies operating defined benefit pension schemes between November 2006 and February 2007.