Irish pension funds still hold average equity
allocations of 50% compared with Netherlands pension funds, which hold an
average equity allocation of 26% and in Switzerland 30%.
European pension funds are increasingly worried about the potential impact of
inflation shocks on their portfolios as markets remain volatile, according to
European Asset Allocation Survey. The survey of over 1,100
European pension funds with assets of over €550bn found that 80% of respondents
are now more concerned about the threat of increasing inflation than they were
last year and many are taking action to protect their assets.
Mercer’s survey shows that 38% of the funds concerned about inflation are
planning immediate action to protect against any shocks. Eighteen percent are
planning to increase their allocation to inflation-linked bonds, 5% are
allocating to inflation-sensitive assets and 3% to inflation swaps. The
remaining 12% have taken some other action such as establishing processes to
exploit opportunities as they arise either through the use of discretionary
management or by introducing a series of triggers that, once hit, will increase
their allocation to inflation bonds or swaps.
Tom Geraghty, Mercer’s head of Investment Consulting for Europe, Middle East and
Africa, commented: “The last 12 months have been characterised by a general
sense of unease and rapid swings from optimism to fear and back again. The use
of loose monetary policies and quantitative easing has created the ideal
environment for the re-emergence of inflation, which is a cause for worry for
many pension funds.
“Protection, through acquiring inflation hedging assets (such as inflation bonds
and swaps), looks to be expensive and there is a risk that such investments
provide ‘insurance’ for events that never actually happen. Pension funds also
need to understand the extent to which their liabilities are affected by higher
inflation. In some cases, inflation caps may mean that higher inflation is less
negative for pension schemes than might be expected.”
Trends in Asset Allocation: Mercer said both Ireland and the UK have a bias to equities though this continues to
decrease year-on-year. Irish funds have seen a record reduction in average
equity allocations since 2010, dropping from 59% to 50%. Allocation to equities
across the rest of Europe remains low, particularly for many funds in Germany
(5%), due to local regulatory restrictions. In the Netherlands pension funds
hold an average equity allocation of 26% and in Switzerland 30%.
“The steady move away from equities has meant that larger plans throughout most
of Europe now have significant exposures to domestic government bonds, “
according to Crispin Lace, partner in Mercer’s Investment Consulting business.
“However, with bond yields at historically low levels the desire is now to
diversify the bond exposure to increase the level of yield within this
portfolio. Many pension funds are therefore considering alternative debt markets
such as high yield and emerging market debt and also some opportunistic ideas
such as distressed and mezzanine debt.”
Going forward, European funds are looking to increase their strategic allocation
to a wide range of non-traditional asset classes. On average 22% of European
funds intend to increase their allocation to emerging market debt (11% of UK
funds). Over 6% of European funds plan to further diversify across debt markets
through allocating more to distressed debt (7% of UK funds).
“With anaemic growth expected in many western economies, the growth rates of
emerging economies continue to attract attention. And pension plans are
focussing on more than just emerging market equities to ensure they tap into the
real growth potential in these markets,” said Lace.