From IDS Pensions Bulletin 215, May 2008

Defined benefit schemes have mixed investment returns

In our latest look at the investment returns amoung defined benefit schemes, IDS found that among a sample of 72 defined benefit schemes with investment year ends on 31 March 2007 a total of 38 schemes achieved an investment return over the previous 12 months that was lower than its stated benchmark. BNY Mellon Asset Servicing records that within its universe of segregated pension schemes the median scheme achieved an investment return of 5.7 per cent over the 12 months ending on that date.

Results as at March 2007

In the previous year ending 31 March 2006 IDS found among a similarly sized sample of schemes that around 73 per cent of the schemes had either beaten or equalled their benchmark. One year later that proportion had fallen to 47 per cent. From that point of view therefore the year ending 31 March 2007 was worse than the previous year.

The fund median return over the year ending 31 March 2006 was 23.1 per cent. The fund median over the year ending 31 March 2007 was 5.7 per cent so the year ending 31 March 2007 was also worse than the previous year in terms of absolute returns.

Asset distribution trends

The average asset distribution for self-administered pension schemes as at 31 March 2007, when compared with the average asset allocation for 31 March 2006 shows that the proportion of UK equities held by the average fund had continued to decline, falling from 35.8 per cent of the average portfolio down to 33.2 per cent. Likewise overseas equities over the year fell from 28.9 per cent of the average investment portfolio to 28 per cent. In contrast the proportion held in bonds and cash had risen from 32.5 per cent as at 31 March 2006 to 34.8.

Investment return over the medium term

The analysis carried out by BNY Mellon Asset Servicing is summarised in the table. It shows that the annualised investment returns achieved by segregated UK pension funds over the one, three, five and ten-year periods ending on 31 March 2007.

What’s in IDS Pensions Bulletin 215