Pension Funds' UK Equity Weightings at Lowest Ever Level

LONDON, March 31 /PRNewswire-FirstCall/ -- New research from BNY Mellon
Asset Servicing reveals that in 2007, UK pension funds' holdings in Global
Equities fell for the eighth consecutive year from 62.7% to 55.1%. This
decline is largely due to funds continuing to reduce their weightings in UK
Equities, which fell from 34.4% to 28.7%. This is the lowest ever allocation
to this asset class. Overseas Equities also fell, from 28.3% to 26.4% and the
split between UK and Overseas Equity is now almost 50/50.
The asset allocation 'winners' in 2007 were Bonds and Index-Linked which
increased from 23.9% to 27.6% and from 7.8% to 9.6% respectively. Within
Bonds, Non-gilts have surged in value over recent years, and marginally
overtook allocations to Gilts in 2006. By the end of 2007, allocations to Non-
gilts at 14.1% were well ahead of Gilts at 11.8%. Cash weightings increased
to 3.1%, up from 1.7%.
According to BNY Mellon, allocation to Other Assets increased during 2007
from 0.8% to 1.6%, reflecting the greater number of pension funds investing in
alternatives, particularly Hedge Funds and Private Equity. However, the
overall allocation remains relatively low with just one in eight pension funds
investing in Other Assets and the typical commitment being around 6% of
assets.
Commenting on the changing asset allocation trends, Alan Wilcock,
Performance and Risk Analytics Director at BNY Mellon Asset Servicing, said:
"While UK Equities has been declining as a major asset class for UK pension
funds over the last few years, 2007 saw the largest fall to date. UK Bond
allocations, including Index-Linked, now exceed UK Equities for the first time
ever."
Fifth consecutive year of positive performance
The weighted average return for UK pension funds for 2007 was 6.4%. This
is the fifth consecutive year of positive performance, following the poor
performance at the start of the decade. Over the last five years UK pension
funds have averaged 12.1% per annum, which represents a real rate of return of
8.7% per annum against the Retail Prices Index and 8.2% per annum against
earnings.
Over 10 years, pension fund returns have averaged 6.5% per annum, a return
of 3.7% per annum in excess of price inflation.
The fund median in 2007 was 6.0% indicating that larger funds produced
slightly higher returns on average compared to smaller funds over 2007.
Historically, larger funds have benefited from higher weightings in Property,
although this was not the case during 2007 when this sector returned -5.2%.
However, larger funds did benefit from having higher weightings in key sectors
such as Emerging Market Equities and Index-Linked Gilts, for which the median
fund returned 39.1% and 8.6% respectively over the year.
2008 - a rollercoaster year for pension funds?
Despite the relatively turbulent market conditions since the summer of
2007, UK pension funds continued to enjoy low return volatility for periods to
the end of 2007. According to BNY Mellon, 80% of schemes have seen
volatility, as measured by the standard deviation, of between 5.1% per annum
and 7.8% per annum over the last five years. These rates were historically
very low, potentially leading investors to a have a greater sense of security
than had been the case historically.
Tracking errors for pension funds relative to their scheme specific
benchmarks were also historically low ranging from 0.6% to 1.8% per annum,
again for 80% of schemes in the survey.
Commenting on the importance of risk, Wilcock added: "Pension funds have
become accustomed to very low standard deviations and positive returns year on
year. However, since the turn of the year, equity markets have fallen and
this is likely to have increased both volatility and tracking error
statistics. Against this background, risk management will no doubt be a
critical element of any scheme's asset allocation strategy."
At the end of 2007, BNY Mellon Asset Servicing measured the performance of
423 pension funds, representing 1873 separate manager portfolios with a total
market value over euro 203billion.
BNY Mellon Asset Servicing offers clients worldwide a broad spectrum of
specialised asset servicing capabilities, including custody and fund services,
securities lending, performance and analytics, and execution services. BNY
Mellon Asset Servicing provides services through The Bank of New York, Mellon
Bank, N.A. and other related companies.
The Bank of New York Mellon Corporation is a global financial services
company focused on helping clients manage and service their financial assets,
operating in 34 countries and serving more than 100 markets. The company is a
leading provider of financial services for institutions, corporations and
high-net-worth individuals, providing superior asset management and wealth
management, asset servicing, issuer services, clearing services and treasury
services through a worldwide client-focused team. It has more than $23
trillion in assets under custody and administration, more than $1.1 trillion
in assets under management and services $11 trillion in outstanding debt.
Additional information is available at bnymellon.com.
SOURCE BNY Mellon Asset Servicing

Louisa Bartoszek of BNY Mellon Asset Servicing, +44 20 7163 2826,
louisa.bartoszek@bnymellon.com