UK defined benefit (DB) pension funds with relatively high bond exposures gained 11% on average in 2014, though strong bond performance also hit their liabilities.
In the two preceding years a high equity allocation was more beneficial, according to State Street figures.
The positive 2014 result brings the five-year performance for UK pension funds to 9% per annum and the ten-year to 8% per annum. This comfortably exceeded most actuaries' assumptions for asset growth, says Jeanette Patrizio, senior vice president of State Street investment analytics.
A disinvestment and underperformance in equities relative to bonds saw the average fund's equity exposure reach its lowest level ever at 43%. Corporate funds now hold an average of 34% of their assets in equities, whilst local authority pension schemes still hold a commitment of just over 60%.
Bond markets performed steadily in the first part of the year when equities were under strain, and surged ahead in August as increasing concerns about geopolitical risk, combined with the reiteration by the Bank of England that interest rates were to remain low for the foreseeable future, made UK gilts particularly attractive for investors.
Bond returns were well ahead of most investors' expectations during 2014. UK index-linked bonds returned 20% percent, which was exceptional in a period where inflation appears to be falling, says State Street. UK gilts also had an outstanding year, with the average fund returning 18% in this sector, well ahead of the FTSE All Stocks Index.
Though strong results from bonds were positive for pension fund asset valuations, they had the opposite effect on liabilities as yields fell by almost a third over the year.
Other details from State Street's UK Pension Funds Universe report include:
- A late rally in 2014 meant that UK equities just managed to produce a positive return for the year of 1%.
- International equities, which now represent a higher proportion of the overall equity allocation of the average fund, performed substantially better, but results varied regionally.
- After two strong years of double-digit returns, European equities were flat in 2014.
- UK investors saw a small negative return on their investment, the result of sterling's continued appreciation against the euro.
- Japanese equities, after being the best performing of the major markets in 2014, produced a return of 3% for sterling investors and 10% in local currency terms.
- Emerging markets produced an overall positive result for the year of 6%. This marked large disparities across regions, with Russian investments falling more than 40% and Indian stocks up 40%.
State Street also found that, after four consecutive years of quite marked outperformance relative to the UK All-Share index, 2014 saw the average active fund track the index return.
Exposure to alternative assets remained broadly static at around 10% of the average fund, but the mix is slowly changing with infrastructure and diversified growth (multi-asset) products gaining traction. Property investment saw a 16% percent return and property now makes up around 7.5% of the average fund, close to the highest ever level.
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