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Allocations To Bonds Could Double

U.K. pension funds are allocating more of their portfolios to bonds and the trend is set to continue, driven in part by more stringent accounting that favors larger bond portfolios, according to industry consultants.

U.K. pension funds are allocating more of their portfolios to bonds and the trend is set to continue, driven in part by more stringent accounting that favors larger bond portfolios, according to industry consultants.

John Gillies, director of consulting at Frank Russell Company in London, said bond allocations could increase to 50% in the next few years. And Peter Eerdmans, senior investment consultant at Watson Wyatt in Surrey, sees a more modest but nonetheless steady increase in allocations to bonds of 2% per year. The U.K. pension fund industry, with approximately £800 billion under management, currently holds 30-35% of its assets in bonds, already up significantly from the 10% low reached during the equity market boom of the late 1990s.

"Pension fund balance sheets are under pressure from a number of corners and part of the pension fund response is to shift investments away from equities to bonds and other assets," said Gillies. The trend is being driven in part by tighter accounting standards for pension fund liabilities. FRS 17, an Accounting Standards Board rule that takes effect in 2005, requires liabilities to be attributed a fair market value based on a double-A corporate bond yield.

In addition, the increase to fixed income is a result of pension funds reducing their equity holdings in a reaction to post-2000 declines in stock markets. Demographics also play a role, as an aging population is in general adding to the increased demand for fixed-income from U.K. plans, the consultants said.

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