FTSE 100 DB pension schemes relentlessly turn to bonds to lower investment risk

14 June 2016

Bond allocation rose by circa £20 billion to a record £330 billion in the year to 31 December 2015

FTSE 100 defined benefits (DB) pensions schemes are increasingly investing in bonds, reflecting a greater prudence in risk management towards their scheme deficits, according to research by JLT Employee Benefits (“JLT”). In its latest quarterly report, JLT found the average FTSE 100 pension scheme asset allocation to bonds has reached 61% in the year to 31 December 2015. In monetary terms, this equates to a rise by circa £20 billion to a record £330 billion in the year to 31 December 2015. Six years ago, bond allocations stood at 50% of their assets.

A number of companies reported very significant individual changes to investment strategies, with seven FTSE 100 companies changing their bond allocations by more than 10% in the last twelve months. Standard Life is the latest company to report a big switch out of equities, with bond allocations increasing by 28%. A total of 62 FTSE 100 companies have more than 50% of pension scheme assets in bonds.

Charles Cowling, Director, JLT Employee Benefits, says: “It is promising to see the change in mindset of trustees. By demonstrating greater prudence, it will inspire more confidence from shareholders and members. We have seen a number of major British institutions facing significant difficulties with their pension liabilities recently, so this is an important step to take.

“What the FTSE 100 pension schemes need, however, are cash contributions that will feed their current deficits. If there can be some momentum gained via the markets, that does not reverse when interest rates eventually rise, there could be some scope to turn things around. But there is a long way to go before the very significant risks still being run in pension schemes will cease to worry shareholders and pension scheme members.”

The FTSE 100 companies with the greatest change in bond allocation were:

Name

Rank

Current Bond Allocation

Previous Bond Allocation

Switch to Bonds

Standard Life

1

73%

45%

+28%

Provident Financial

2

84%

60%

+24%

Barratt Developments

3

75%

52%

+24%

Land Securities

4

82%

64%

+19%

Vodafone

5

64%

48%

+16%

The FTSE 100 companies with the highest allocation to bonds were:

Name

Rank

Assets £m

% of Assets in Bonds

Direct Line Insurance

1

85

99%

Rolls-Royce

2

12,554

92%

Aviva

3

16,161

87%

Prudential

4

7,819

87%

Royal Mail Group

5

6,619

87%

The FTSE 100 companies with the lowest allocation to bonds were:

Name

Rank

Assets £m

% of Assets in Bonds

Ashtead

96

 93

21%

Tesco

97

 9,677

19%

Merlin Entertainments

98

 28

18%

British Land

99

 139

2%

Hammerson

100

 63

0%

Overall, FTSE 100 companies are looking for lower risk investment strategies at a time when they are struggling to keep up with contributions to plug their pension scheme deficits. Despite the total deficit of FTSE 100 companies dropping to £70 billion from £82 billion 12 months ago, contributions have fallen by £0.6 billion in the same period. Less than one third (29) of companies are currently disclosing a surplus and 58 continue to report deficits of their DB pensions schemes.

Charles Cowling adds: “The option of bond holdings may also be a luxury for a limited number of the FTSE 100. JLT’s data shows that it is only the most well-funded pension schemes who have been able to take advantage of a low risk strategy, with the ten best funded schemes holding an average of 80% of bond investments compared to an average of less than 30% held by the worst-funded schemes.

“There remain significant concerns around those who cannot opt for bond-focused investment strategies – and these schemes are often the ones with the most to lose. With lower assets to back up a higher-risk, equity strategy, a number of FTSE 100 companies are still gambling in the investment casino, to try to keep on top of their deficit contributions.

“With interest rates at an all-time low and further uncertainty ahead of the EU Referendum, pension schemes continue to represent a material risk to a number of FTSE 100 businesses. Ten FTSE 100 companies have total disclosed pension liabilities greater than their equity market value.”                                                    - ENDS -

To read highlights of the report, click here.

Notes to Editor

Enquiries:

Smithfield Consultants:

Fay Israsena | T: +44 (0)20 7903 0633| E: fisrasena@smithfieldgroup.com

Raeesa Chowdhury | T: +44 (0)20 7903 0635| E: rchowdhury@smithfieldgroup.com

About JLT Employee Benefits

JLT Employee Benefits is one of the UK's leading employee benefit providers offering a wide range of benefit and pension services, including administration, actuarial and pension consultancy, investment, Self Invested Personal Pensions (SIPPs) and Small Self Administered Schemes (SSASs) administration, flexible benefits, healthcare, benefit communication and financial education.

JLT Employee Benefits employs over 2,200 professionals throughout the UK and in 2013 had revenues of £172m in UK & Ireland.

Pensions and employee benefits companies within the JLT Employee Benefits group of companies include: JLT Benefit Solutions Ltd, Profund Solutions Limited, JLT Wealth Management Limited, JLT Investment Management Limited and Independent Trustee Services Limited. JLT Employee Benefits is part of Jardine Lloyd Thompson Group plc.

www.jltemployeebenefits.com

About Jardine Lloyd Thompson Group plc

Jardine Lloyd Thompson is one of the world's largest providers of insurance and employee benefits related advice, brokerage and associated services. JLT's client proposition is built upon its deep specialist knowledge, client advocacy, tailored advice and service excellence.

JLT is quoted on the London Stock Exchange and owns offices in 39 territories with some 9,000 employees. Supported by the JLT International Network, it offers risk management and employee benefit solutions in 135 countries.

www.jlt.com

contact Charles Cowling
Director charles_cowling@jltgroup.com 0161 242 5388