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The Actuary The magazine of the Institute & Faculty of Actuaries
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Changing pension fund investment scene

The weighted average return for UK pension funds in 2004 was 10.4%, according to Russel/Mellon’s annual analysis. This puts pension funds just back into positive territory over five years, with a weighted average return of 0.1%pa. Pension funds have effectively wiped out the investment losses suffered in the first three years of the decade.

The fund median for 2004 was 10.5%, indicating that larger pension funds produced broadly similar performance to smaller pension funds over the year. However, the analysis shows that small and large schemes had different investment strategies. While the performance of smaller schemes benefited from higher equity weightings and lower fixed-interest and index-linked weightings, larger funds benefited from higher weightings in property.

Funds adopt new mandates

Over the past 16 years pension funds have been increasingly adopting new portfolio mandates within their fund structures. At the end of 1989, just less than one in ten portfolios had been newly appointed during the year. In 2004 however, this had risen to around one in five. This increase in activity has been influenced by a number of factors. Daniel Hall, Russell/Mellon’s publications and statistics manager said, ‘Since the end of the 1980s, pension funds have increasingly adopted scheme-specific benchmarks in place of universe comparisons. This has led to a move away from balanced and multi-asset-based portfolio structures and towards specialist structures with a greater number of mandates’.

UK equity weightings at an all time low

UK pension fund weightings in UK equities fell for the fifth consecutive year in 2004. The weighting of 39.0% at the end of December 2004 represented another all time, year-end low. At the same time, weightings in overseas equities continued to rise from 26.7% to 27.5%, an all time, year-end high.

Weightings in UK bonds rose from 19.4% to 21.2% in 2004. By contrast, funds further reduced their weightings in overseas bonds from 1.1% to 0.7%. Within the UK, corporate bonds continued to increase in popularity with pension funds such that, by the end of 2004, they had overtaken gilts as an asset class. At the end of 2004, pension funds held on average 10.4% of their assets in gilts and 10.8% in corporate bonds.

At the end of 2004, Russell/Mellon measured the performance of 672 UK pension funds, representative of 1,885 separate manager portfolios, with a total market value of £178bn.