British pension funds have enhanced allocation towards hedge funds to 5.2%, up from 4.5%, Purple 2013 data reveals.

Pension funds’ equity allocation fell to 35.1% from 38.5% reported in 2012, while the proportion of gilts and fixed interest rose to 44.8% from 43.2%.

Pension fund trend in asset allocation maintained

The Pensions Universe Risk Profile (Purple Book) is a joint initiative by Pension Protection Fund and the Pensions Regulator which focuses on the risks faced by Defined Benefit pension schemes, predominantly in the private sector.

Purple 2013 reveals a continuation of most of the trends witnessed in recent years: a falling equity allocation and a rising proportion in bonds, hedge funds and cash and deposits. This is apparent from the following table:

Pension Average asset allocation

Interestingly, within equities, the data reveals a rising overseas share and falling U.K. share.

During 2013, there was a further drop in insurance policy holdings as schemes reported more accurate asset allocations.

As revealed by the following graph, the proportion of assets held in gilts and fixed interest and in hedge funds increases with the scheme’s size. The proportion held in insurance policies and cash and deposits decreases with scheme size.

Schemes by asset size

Fall in corporate bond allocation

Purple 2013 data reveals that within bonds, for the first time, there was a fall in corporate bond allocation and a slight rise in government bond allocation. While 10-year gilt yields declined to 1.8% from 2.2%, 10-year AA corporate bond yields fell to 2.9% from 3.9%.

Gilt and fixed interest

Equity splits

Providing further insight into equity splits, Purple 2013 data reveals within equities, the overseas and unquoted equity proportions continue to rise.

For instance, the overseas proportion of total equity holdings rose from 60% in 2012 to 61.3% in 2013, with the U.K. proportion dropping from 33.9% to 31%. The balance of holdings in unquoted equities rose from 6.1% in 2012 to 7.7% in 2013.

When looking at simple averages, for the first time since the start of the series in 2008, the allocation to U.K. equities is smaller at 47.5% as compared to overseas equities at 50.3%.

The following table provides insight into equity splits:

Equity splits

Purple 2013 points out there were a slight reduction in long-term risk to the Fund between end-March 2012 and end-March 2013. This was largely attributable to an improvement in PPF’s own funding level in the 12-month period.