At least £25bn of pension funds pulled from UK stocks last year as ‘race to the bottom’ gathers pace

At least £25bn of pension funds pulled from UK stocks last year as ‘race to the bottom’ gathers pace

Friday, December 16, 2011

According to new research from the National Association of Pension Funds (NAPF), private sector employers in the UK are increasingly abandoning generous defined benefit (DB) pension schemes. This domino effect has been replicated in the UK stock market, with at least £25bn withdrawn from listed companies by DB pension funds over the past year.

As unions continue to negotiate with the government over the reduction of public sector pension promises, it appears that private companies are accelerating the pace at which they switch to less generous defined contribution (DC) schemes.

The NAPF’s latest annual survey found that approximately 250,000 savers have been barred from DB end-salary plans over the past three years. Of these, 23% are now closed to new staff and dues from existing members.

30% of schemes open to contributions from current members but closed to new members aim to close within the next five years. Only 19% of end-of-career salary schemes are still open to new staff, says the ANPF.

The results will come as little surprise to many investors who have seen end-of-career pay schemes rack up huge deficits over the past decade as they threaten the long-term existence of the sponsoring company.

NAPF chief executive Joanne Segars said: “The private sector is seeing a seismic shift in its pensions, and more shifts are certain.”

She continued: “People will often find the replacement pension on offer to be good. It is encouraging to see that, despite the difficult economic climate, the payouts of defined contribution pensions by staff and their employers have remained stable.”

The survey revealed that total contributions to DC plans have hovered around the 12% mark for five years now. This contrasts with an Office of National Statistics survey published this summer which found that DC pots were being made up an average of 9.3% of pay in 2009.

Run for safety

The NAPF survey also showed that UK pension funds reacted to a turbulent year in stock markets by fleeing them. He says only 42% of pension assets are now invested in stocks, down from 46% in 2010.

Among holdings of UK equities, this decline is even steeper – from 17.1% of the average holdings of the funds surveyed in 2010 to 12.2% in 2011. The sheer volume of assets held by pension funds is a bad news for listed companies.

The finding ties in with data held by Pension Funds Online, which shows that the average pension fund allocation to UK equities has steadily declined over the past decade, from a peak of 51% in 2000 to 28, 7% in 2010.

Nearly £500bn of assets were represented in the funds that responded to the survey, showing that at least £25bn has been taken out of UK equities by final compensation schemes over the course of Last year.

However, it was not necessarily a negative view of their outlook that drove pension funds out of equities. The process of “risk reduction” that final wage systems (which seek to shut down) typically follow automatically involves dumping equities for more risk-averse assets, such as bonds.

The total proportion of pension fund portfolios invested in equities outside the UK, Europe and North America rose from an average of 15.3% in 2009 to 21.2% in 2011, according to investigation. This suggests a lack of confidence among UK pension funds in the growth prospects of these regions relative to emerging markets.

First published on 15.12.11

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