Despite the uptick in the aggregate bond allocations, the data shows investment mismatching persists across some of the UK's largest DB pension schemes.

Many schemes have also switched to cashflow-driven investment (CDI) to find low-risk matching bonds, suggesting that the use of alternative investment strategies will continue to grow.

Drive to de-risk

The average pension scheme asset allocation to bonds is now 64%, which has increased from 62% a year before, and compares to 35% 10 years ago.

A number of schemes reported "significant de-risking" strategies, including 10 blue chip schemes that switched more than 10% of assets into bonds during the last 12 months. Legal & General is the latest company to report a big switch, with bond allocations increasing by 23%.

JLT estimates the total deficit across FTSE 100 DB schemes fell by 34% to £41bn over the year to 31 December 2017.

JLT Employee Benefits chief actuary Charles Cowling says FTSE 100 pension schemes have clearly been proactive in taking steps to de-risk their schemes, and the significant shift into bonds is an encouraging sign of trustees' and sponsor commitment to tackling scheme risk in company balance sheets.

Despite this, the findings suggest high levels of investment mismatching clearly persist across some of the UK's largest DB schemes.

Investment mismatching

Investment mismatching, in terms of the IAS 19 accounting position, refers to liabilities being valued using AA corporate bonds. Therefore, assets other than these bonds will lead to a mismatch.

JLT says the allocation of pension scheme assets to bonds gives an indication of the level of investment mismatching.

Some of the FTSE 100 companies with the highest percentage of assets allocated to bonds include: InterContinental Hotels (100%); Direct Line Insurance (97%); Legal & General (92%); Rentokil Initial (92%); Rolls-Royce (90%) and Prudential (88%).

Those with lowest allocation to bonds include: Hammerson (0%); British Land (6%); Ashtead (19%); Informa (23%) and Tesco (41%).

JLT reports that despite the fact that there is an increasing weight of opinion from academics and analysts that mismatched investment strategies in pension schemes reduce shareholder value, and can lead to balance sheet volatility, the data suggests some companies are still running very large mismatched equity positions in their DB pension schemes.

Schemes prepared to take equity risk were rewarded in 2017, as stock markets enjoyed highs.

"Equity allocations proved helpful to scheme portfolios through the second half of 2017, when strong market returns provided a much-needed boost to portfolio returns and supported improvements in underlying funding levels," says Cowling. "However, market conditions in 2018 have delivered a much rougher ride and maybe as a result, pension schemes are increasingly looking at alternative investment strategies."

Russell Investments head of liability-driven investment solutions David Rae says - as some schemes have seen an uptick in funding levels - 2018 has been an opportune time to move away from equities and into bonds.

"Bonds give you the return with much less risk. As a corporate sponsor, if you're worried about the balance sheet and income statement risk, then switching more assets to bonds is a sensible strategy to de-risk. As such, we could see a more dynamic allocation across portfolios [this year]."

Emergence of CDI

Over the past year, companies continued to tackle mounting pension liabilities by closing schemes to both future and current employees.

With 27 of the FTSE 100 DB schemes now closed to future accrual, many will be thinking about the end-game for their schemes.

According to Cowling, this explains the popularity of locking down risk via CDI, which matches liabilities with a range of fixed income assets while still generating a modest return.

The emergence of CDI has allowed schemes to invest in low risk matching bonds but at the same time benefit from higher returns through a diverse portfolio of multi-asset credit funds.

While pension schemes have been keen to reduce risk, switching out of equities into bonds can mean an unwelcome call for additional funding on employers.

However, Cowling explains that CDI strategies are increasingly allowing pension schemes to reduce risk while at the same time allowing them to retain sufficient investment returns to avoid the need for additional employer funding.

"With the growing interest in CDI strategies and the opportunities to lock in gains offered by recent strong equity markets, we expect to see the trend to de-risk pension schemes by switching out of equities to continue, and possibly even gather pace during 2018," he says.