From IDS Pensions Bulletin 205, May 2007

Investment returns show DB schemes beating their benckmarks

The IDS Pensions Service has found that among 85 defined benefit schemes with investment year ends on 31 March 2006 the overall return achieved over the year ranged from 29.4 per cent to 14.4 per cent, while Mellon Analytical Solutions reports that median scheme at that date returned 23.1 per cent. Among the 82 schemes with a bespoke benchmark, 60 schemes either beat or equalled that benchmark.

In this article all the individual scheme results reported are as at 31 March 2006. The traditional year end, however, for reporting on investment performance in the annual reports and accounts of occupational pension schemes has been 31 December. Over the years, however, the IDS Pension Service has found that the a majority of occupational pension schemes have changed to use instead 31 March as the end date for their year-end for investment reporting purposes, even if the scheme, for example, uses 5 April as the year end for its own accounts. A large minority, however, of the annual reports continue to use 31 December as the investment reporting end date, and a smaller but still significant number of schemes now have adopted 30 June for these purposes.

Annual returns to 31 March 2006

Over the 12 month period ending 31 March 2006:

• UK equities gave an investment return of 28 per cent, with an average fund asset allocation of 35.8 per cent

• Overseas equities gave an investment return of 31.9 per cent, with an average fund asset allocation of 28.9 per cent

• UK fixed interest bonds gave a return of 7.4 per cent, with an average fund asset allocation of 22.1 per cent

• Overseas bonds gave a return of 3.7 per cent, with an average fund asset allocation of 1.0 per cent

• Global index-linked gilts gave a return of 8.4 per cent, with an average fund asset allocation of 7.6 per cent

• Cash gave a return of 4.5 per cent, with an average fund asset allocation of 1.8 per cent, and

• Property gave a return of 21.9 per cent, with an average fund asset allocation of 2.8 per cent.

Benchmarking funds

During the 1980s it was common for the trustees of defined benefit occupational pension schemes to instruct their scheme managers to invest the funds, more or less, in order to maximise the investment return while minimising the investment risk, without setting specific benchmarks. Such an approach was possible at a time when many pension schemes were still relatively young and the accrued liabilities were much smaller.

However, over recent years trustees have increasingly moved to use benchmarks which are scheme specific. This has been driven by a number of factors including the requirement for trustees to devise a statement of funding principles which sets out, among other things, their policy on the kinds of investments to be held, the balance between the different kind of investments, the risks, including the way the risks are to be measured and managed and the expected return on investments.

In the year ending 31 March 2006, scheme-specific benchmarks had been adopted by 82 of the 85 defined benefit schemes included in this article. These are often in the form of requiring the investment manager to outperform certain stock market indices. Among the 82 schemes which have adopted a scheme-specific benchmark, 60 schemes either beat or equalled that benchmark.

What’s in IDS Pensions Bulletin 205