For the first time since the mid-seventies, pension funds now hold more of their assets in bonds investment than shares.
2012 saw pension funds increase their average holdings in bonds and similar fixed-interest investments to 39% from 2011’s 33%, with a huge drop from an average of 42% in shares in 2011 to 35% by the end of last year, says the latest figures from the National Association of Pension Funds’ (NAPF) annual survey of company pensions. The remaining 26% of pension fund investments for 2012 consisted of private equity, property and other types of alternative assets.
This represents a significant shift in pension fund investments, with equally significant consequences for anyone currently receiving a pension or about to start shortly. According to the NAPF the last time funds had less shares than bonds was 1975. By way of comparison, only in 2007 pension fund shares investment was 55%, almost double that of the 29% in bonds investment.
Unfortunately, as result of this disproportionate dip in shares investments, pension funds have not seen as much benefit from the stock market’s stunning rally in the New Year as could otherwise have been the case. This has resulted in a large discrepancy between the recent defined contribution schemes and ‘gold plated’ final salary pensions. The NAPF’s annual survey indicates defined contribution schemes were worth less than a quarter of final salary pensions, only £20,150 per member in contrast to the comparatively rather handsome £88,500 per member for the final salary pensions—gold plated indeed!
This recent pension fund hunger for bond investments is also making problems for pension scheme managers, both forcing the yields of government bonds to record lows and decreasing the supply of government bonds, increasing pension scheme deficits in turn.
As a result of this imbalance, companies are also now withholding final salary pension schemes for new contracts: only 13% now open to new staff from 33% in 2011. A powerful shift towards defined contribution plans seems underway.