Shifting investment landscape for Defined Benefit pensions

Changes in Defined Benefit (DB) pension provision – highlighted in a new report from the Pensions Policy Institute (PPI) - could open up exciting new opportunities for investment managers, according to Threadneedle.

The report, “The changing landscape for private sector Defined Benefit pension schemes” identifies a move among DB schemes towards more diverse investment strategies, and a shift away from traditional equity and bond investments. The report shows pension fund assets invested in equities fell from around 65% in 1997 to just 40% in 2005, while investment in bonds fell from 23% in 2002 to 19% in 2005. According to Threadneedle, which helped fund the report, the result is that schemes are increasingly open to innovative new solutions, which diversify funds’ portfolios, reduce volatility and offer higher returns.

Threadneedle observes increased demand from pension funds which are now looking seriously at new higher-alpha generating strategies such as absolute return, equity long-short and extended alpha, in place of more traditional lone asset classes.

Head of UK Distribution at Threadneedle, Madeline Forrester, said: "This report questions the perceived wisdom that DB schemes will fade away from the pension landscape. Even in the private sector, there are signs that DB schemes may continue to make up a significant part of overall pension provision for longer than some expected. This will prove to be more likely if we can encourage employees to recognise the true value of the pension benefits on offer are understood and appreciated by scheme members.”

"A finding particularly noteworthy for asset managers is that 17% of DB schemes in the private sector adopted a liability-driven investment strategy, while a further 30% said this was under consideration. We are pleased to see findings that new products and innovations which give trustees the possibility of achieving their twin objectives - preventing deficit growth while achieving higher returns - are increasingly popular. Threadneedle’s LDI solution aims to do both of these things. Even given DB provision may last longer than expected, DC schemes still continue to be an increasingly important part of the pensions market landscape, and we continue to boost our offering in this area.”