Ashby's Answers: Are UK pension funds too backward looking?

PENSION FUNDS

A recent comprehensive analysis of annual reports for companies in the FTSE 350 reveals something that has seemed inevitable since Gordon Brown's removal of the tax credit on dividends - the average UK pension fund's equity allocation has now fallen below bonds.

This shift in asset allocation is understandable given the increased maturity of many pension schemes and the recent underperformance of equities, but is it really sensible to continue this trend given the current huge differential in yields? For example, 10-year gilt yields are currently 1.5% and average sterling corporate bond yields are now 4.2% – both record lows. In contrast, the prospective dividend yield on the FTSE All Share index is 4% and, with strong balance sheets and high levels of profitability and cash generation, dividend growth prospects remain good.  As a result, the di...