March 29, 2012

UK Pension Funds Post Positive Returns for Third Consecutive Year

Equities continue to fall out of favour with a 6.1% reduction in equity allocations over 2011

Allocations to equities have fallen from 72.4% to 45.3% over the last 10 years

LONDON, 29 March 2012 — The average UK pension fund achieved a weighted average return of 4.3% for the year ending 31 December 2011, reveals BNY Mellon's annual UK pension fund performance research. This is the third consecutive year UK pension funds have posted a positive annual return since the financial crisis in 2008; a year which saw funds provide an annual weighted average return of -13.6%.

During 2011, overseas equity returns were predominantly negative for pension funds with returns ranging from -18.4% for emerging market equities to -13.5% for European ex UK equities. US equities made some small gains during the year and it was the only major equity sector to provide positive results during 2011, with 0.4%. During the last year, the median fund returned -8.8% for Overseas equities overall, and -3.4% for UK equities whilst the overall fund median was 4.8%.

"UK pension funds were particularly affected by instability in the equity markets during the third quarter of 2011, which was partially due to fears over the Greek debt crisis spreading to Spain and Italy," said Alan Wilcock, Performance & Risk Analytics Manager, BNY Mellon Asset Servicing. "The sharp fall in stock prices during August were also at the same time the United States government's credit rating was being downgraded for the first time."

This is evident in the pension fund returns for quarter three 2011, with the median fund returning -13.6% for UK equities and -16.4% for overseas equities. These are the lowest quarterly median returns BNY Mellon has recorded for equities since the stock market downturn in the third quarter of 2002.

After suffering losses during quarter one as a result of the tsunami that struck Japan in March 2011, Japanese equities marginally recovered during the second quarter of 2011 with a median return of 0.1%. This was not the case during the latter half of 2011, with pension funds returning -6.8% in this sector in the six months to year end.

The fixed income sector provided funds with some stronger returns, particularly UK Gilts which provided a median return of 24.8% and UK Index-Linked Gilts which returned 23.3%.

"This was influenced by the Bank of England's program of quantitative easing, which saw around €75 billion channelled into the UK economy in October 2011 through the purchase of assets including government bonds," observed BNY Mellon's Wilcock. "Whilst the impact of falling interest rates led to the value of these assets increasing, it will have no doubt added to the rising liabilities of UK pension funds."

"During 2011 pension funds experienced a wide range of individual results, depending on the extent to which they were following liability driven investment strategies. The top performing funds achieved returns above 12.4% and the bottom performing funds achieved returns below -4.2%," added Wilcock.

Over the last five years, UK pension funds achieved a median return of 4.1% per annum, which represents a real rate of return of 0.7% per annum against the Retail Prices Index and 1.8% per annum against the Average Weekly Earnings Index. Over 10 years, pension fund returns have averaged 5.8% per annum, a return of 2.5% per annum in excess of price inflation and 2.6% per annum against earnings.

Asset allocation trends over 1 year and 10 years

The latest results from BNY Mellon Asset Servicing reveal that over the last decade UK pension funds have shifted their investments from equities to fixed income, although equities still remain the largest single component of their portfolios.

After a brief resurgence in 2009, pension fund holdings in equities have continued to decline. During 2011, allocations to equities fell by 6.1% from 51.4% to 45.3% which BNY Mellon notes is largely due to funds continuing to reduce their weightings in UK equities. Over the last decade, BNY Mellon's research shows that allocations to equities have fallen from 72.4% to 45.3%. Holdings in overseas equities have remained fairly static over this period; UK equities have declined from 47.4% to 18.1%.

Over the year, investment in bonds did not see any significant overall changes, but over a 10-year period holdings in this sector have increased by 10.1%. The changes have been most notable in UK Non-Gilts which saw holdings in this sector increase from 5.0% at the end of 2001, to 19.4% at the end of 2011.

Index-Linked Gilts exhibited a similar pattern over the decade, showing an increase of 10.0%. On a one-year basis, this sector saw allocations increase by 1.7%, which BNY Mellon believes may be attributed to the strong performance of this sector during 2011.

During the year, investment in other assets increased from 1.7% to 2.3% showing continuous interest in alternative investments. BNY Mellon also noted that holdings in property increased during 2011 from 3.1% to 3.8%, and apart from a brief dip during 2009, BNY Mellon's research reveals that weightings in this asset class have steadily risen since the start of 2000.

Total Fund weighted average return for the year until 31 December 2011 is calculated as follows:

  • The weighted average return represents the total performance of the pension fund assets within our sample.
  • The weighted average is used in preference to the simple unweighted average, which takes no account of fund asset size.

The performance analysis and other information in this press release are based on historical data and are intended for informational purposes only. Past performance is not a guarantee of future performance. This press release does not constitute investment advice, nor is it an offer or recommendation of any security, investment product, service or firm.

BNY Mellon is a global financial services company focused on helping clients manage and service their financial assets, operating in 36 countries and serving more than 100 markets. BNY Mellon is a leading provider of financial services for institutions, corporations and high-net-worth individuals, offering superior investment management and investment services through a worldwide client-focused team. It has $25.8 trillion in assets under custody and administration and $1.26 trillion in assets under management, services $11.8 trillion in outstanding debt and processes global payments averaging $1.5 trillion per day. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation. Additional information is available at and through Twitter @bnymellon.

This press release is issued by The Bank of New York Mellon to members of the financial press and media. All information and figures source The Bank of New York Mellon as at 31 December 2011 unless otherwise stated. The Bank of New York Mellon, London Branch, registered in England and Wales with FC005522 and BR000818. Branch office: One Canada Square, London E14 5AL. Authorised and regulated in the UK by the Financial Services Authority.