A third of UK pension schemes plan to cut their investments in domestic equities over the next year and a further fifth plan to cut their holdings in overseas stocks, despite the fact they will have to crystallise losses to do so.

According to the latest Asset Allocation Survey from Mercer, the benefits consultancy, only 2 per cent of UK plans intend to step up their equities investments this year, although by some measures, shares currently represent good value.

Crispin Lace, senior investment consultant at Mercer, said that on the face of it the investment decision by pension funds may appear counter-intuitive. “From a pure investment standpoint, this looks odd,” Mr Lace said. “But trustees are balancing this decision against not only a view on investment risk but also on the covenant risk of the employer.”

Mr Lace said that the economic downturn had been so severe that trustees had been forced to consider whether their plan sponsor is likely to weather the recession. If there are doubts, it should prompt a move to a more conservative investment strategy even if investing in equities otherwise seems a good choice right now.

“They are saying ‘I can’t go any lower [on funding]. I have to bite the bullet’,” Mr Lace said. “It is a difficult decision for trustees.” However, equities remain the single largest asset class within UK pension schemes, with the average plan holding a 54 per cent allocation, down from 58 per cent a year ago.

The survey covered more than 1,000 pension schemes with aggregate assets of €400bn (£353bn).

Mr Lace said the latest survey provided hard evidence of what Mercer had picked up from anecdotal evidence in earlier years. Although weightings of equities holdings had been rising through 2007, they had done so by smaller amounts than stock markets on average had risen. That means that schemes were crystallising at least some of their profits.

Meanwhile, the survey also found schemes increasingly willing to move into alternative asset classes. Among UK schemes, 35 per cent expect to introduce new investments.

However, not all diversification was a wise choice last year. Of those UK schemes surveyed, 8 per cent had an exposure to Global Tactical Asset Allocation, a category that did “not do very well at all” in 2008, Mr Lace said. However, the shift into hedge funds and funds of funds – now 11 per cent of the total – probably helped returns, he said.

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