FTSE 100 defined benefit (DB) pension schemes could have 90% of their portfolios invested in bonds a decade from now.
The estimate, from actuary JLT Employee Benefits, comes as research by the firm shows that schemes now have a 60% allocation to bonds after a 5% increase over the year.
Greater use of liability-driven investment (LDI) strategies caused the increase. Six years ago, the average bond allocation was only 45%.
JLT’s quarterly report, The FTSE 100 and their pension disclosures
, estimates that the total deficit in FTSE 100 pension schemes had reached £89 billion (€129 billion) at 31 March 2015, a deterioration of £30 billion from 12 months ago.
Six of the companies have pension liabilities greater than their equity market value, with BAE Systems, International Airlines Group, RSA and Royal Bank of Scotland having total disclosed pension liabilities almost double their equity market value.
According to Charles Cowling, director, JLT Employee Benefits, bonds, and LDI strategies in particular, have outperformed equities in the last year, which has led to an increase in bond holdings. As LDI becomes more of a norm, so bond allocations will increase.
He predicts that average bond holdings could be up to 70% within five years, and up to 90% within ten years.
“Most companies and pension schemes wish to reduce investment risk [by switching to bonds] more than they have…” says Cowling. This is particularly the case because of pensions regulations that put more focus on funding, investment, and employer covenant.
“Often, the only thing that stops them is a large deficit and/or a lack of funding commitment, which spurs them to keep investment risk in the hope for higher returns. As and when deficits eventually reduce, the barriers to switching into bonds will largely disappear.”
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