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Last Updated:
Apr 24, 2009 - 5:31:05 PM |
European pension funds increase weightings in non-traditional asset classes; 47% of Irish schemes have indicated a further decrease in equity exposure
By Finfacts Team
Apr 22, 2009 - 10:58:27 AM
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| Chart 1 – Allocation to alternative assets: Europe ex UK |
Following last year’s unprecedented market conditions, European pension schemes are increasing their allocation to non-traditional asset classes to manage their risks more effectively, according to Mercer’s annual European Asset Allocation Survey. The survey of over 1,000 European pension funds with assets of €400 billion found that 60 percent of European schemes (excluding the UK) expect to introduce new investment opportunities into their portfolio to help manage future investment risk. 47 percent of Irish schemes have indicated a further decrease in equity exposure.
Brian Griffin, Head of Mercer Ireland’s investment consulting business commented: “European pension funds have all felt the effect of the last year’s market turmoil. The banking crisis has highlighted the operational risks associated with the investment of institutional assets and brought counterparty credit risks more into focus. Funds are now looking at ways to manage the risk inherent in their schemes, in part through further diversification of their assets.”
Trends in asset allocation
The steady reduction in benchmark allocations to equities in markets with traditionally high exposures was accelerated by last year’s market turmoil. In Ireland the allocation fell from 67 percent in 2008 to 60 percent in 2009 and in the UK from 58 to 54 percent. Exposure to equity markets remained low across other European markets.
In both Ireland and the UK, 47 and 33 percent of schemes respectively have indicated they are planning a further decrease in equity exposure over the next 12 months. Irish schemes are looking to couple this with an increase in exposure to both government bonds (34 percent of schemes) and non-government bonds (12 percent).
Noel Collins, principal at Mercer commented: “Both in Ireland and the UK the move away from equities is driven by both the market downturn and the increasing maturity of schemes. As schemes close they tend to reduce their exposure to equities in favour of bonds with the average closed scheme having a bond exposure that is approximately 10 percentage points higher than the average open scheme.”
While bonds continue to be the dominant asset class in most European countries, an increasing number of funds are diversifying to non-traditional investment opportunities. According to the report, in Europe, schemes favour hedge funds (14 percent of schemes have an allocation), commodities (12 percent) and high yield bonds (10 per cent). Collins said: “The pattern of allocation to non-traditional asset classes varies from market to market, due both to historical trends and preferences and to the level of sophistication of investors”
Reviewing the impact of the market turmoil
Turbulent markets are prompting broad and deep reviews of all aspects of pension scheme policy. Over two thirds of respondents to the Mercer survey have either undertaken investment related reviews in 2008 or said they intended to do so in 2009. Of those, close to 70 percent reviewed their counterparty exposure risk in 2008 and over half reviewed their cash management. Over 70 percent expect to review stock lending programmes in 2009 and 46 percent plan to analyse transaction costs.
