Neil Woodford has told Britain’s struggling defined benefit schemes to rethink their heavy exposure to government and corporate bonds.
In his blog on Woodford Investment Management’s website, he claimed as schemes’ liabilities had grown, trustees had become ever more conservative in their asset allocation, in an effort to de-risk. It argued this was a self-defeating strategy.
“Rather than investing in the growth assets that would give a scheme the best chance of meeting the future income needs of its pensioners, asset allocation has instead become an exercise of ‘liability-matching’, ‘de-risking’ and reducing scheme volatility,” he said.
“To us this doesn’t make sense. If the age-old relationship between risk and return continues to hold true, ‘de-risking’ must also mean ‘de-returning’.
“By reducing equity exposure, DB schemes have exacerbated the UK’s pension deficit problem by making it even harder for the gap between assets and liabilities to close in the future.”
The blog pointed out that since the 2008 financial crisis, the dividend yield of the FTSE All Share index had exceeded the 10-year gilt yield.
Over that time, however, DB schemes have actually ramped up their exposure to bonds.
According to figures published yesterday (30 August) by JLT Employee Benefits, the DB schemes of FTSE 250 companies had on average 55 per cent of their assets in bonds. Five years ago, the figure was 48 per cent.
Dechra Pharmaceuticals, pub company Enterprise Inns, financial services firm Investec and “global workplace provider” Regus allocated 100 per cent of the their assets to fixed interest.
While Woodford’s blog insisted investing in equities would pay off, it conceded that the “asset class is not without risk”.
Woodford is not the first investment house to call for DB schemes to rethink their investment strategy. Earlier this month, JP Morgan Asset Management head of pensions advisory Sorca Kelly-Scholte said the same thing.
However, she went a step further, arguing that schemes should stop marking pension liabilities to gilts.
“Broadening the opportunity set to include a wider array of assets that can help secure cashflows, to allow more cost-effective management of the liability cashflows, is a rational strategy,” she argued.
james.fernyhough@ft.com
