UK pension schemes shy away from private equity

It has been revealed that UK pension schemes are shying away from private equity due to the fact they need firm income and more reliable investment returns for the future. As a consequence, a report by the National Association of Pension Funds has confirmed that the allocation of funds to private equity fell from 2.5% to just 1% as of the end of June 2009. While this does not seem like a massive adjustment in the allocation of funds to private equity investment, it will have an impact in the longer term.

As we have seen, the pension fund deficits of so many well-known companies in the UK have grown substantially over the last decade and pension trustees feel that they now need to maintain a high level of fixed interest assets, predominantly UK gilts which are backed by the UK government. While this will allow pension fund trustees to accurately predict their income into the future, and a return on their investments when the gilts are redeemed, it will reduce actual "investment returns".

It is worth remembering that pension funds are not only reducing their potential investment returns on an annual basis, but there is also the impact of an investment return on an original investment return, i.e. the reinvestment of profits.