Key Takeaways
- • Mercer's European Asset Allocation Survey of 1,211 institutional investors across 13 countries, covering roughly €1.1 trillion in assets, shows European pension schemes shifting from equities into bonds and alternatives.
- • Alternative assets have grown from 3% to more than 20% of European pension assets over the past decade, according to Mercer.
- • Respondents plan a net -18% reduction in domestic equity and -11% in property, while domestic inflation-linked government bonds are set to rise a net 28% and domestic fixed-interest government bonds a net 17%.
- • The UK made up 48% of the surveyed assets, followed by Germany at 16%, Denmark at 12% and the Netherlands at 6%.
- • Among UK respondents de-risking, 68% delegate the operation, with 87% of those turning to a third party.
Summary
De-risking has driven a marked shift in European pension investment away from equities and toward bonds and alternative assets, according to research from consulting firm Mercer. Its latest European Asset Allocation Survey, based on responses from 1,211 institutional investors across 13 countries with total assets of €1.1 trillion, found that the alternative asset class has grown from 3% of assets to more than 20% over the past decade.
The UK was the most heavily represented market in the survey at 48% of total assets, followed by Germany at 16%, Denmark at 12% and the Netherlands at 6%. Allocation patterns vary considerably by country. Belgian investors hold largely non-domestic equity (44%) and bonds (46%), with few alternatives, while French investors are weighted toward domestic equity (38%) and bonds (51%). Portuguese and Dutch investors have the highest bond exposure, at 65% and 60% respectively. Swiss and Italian investors hold the largest property allocations, at 23% and 20%, and Danish investors have a relatively high alternatives allocation, while Germany stands at 29% in that sector.
Mercer's authors note that changing risk tolerances and the global investment environment are prompting many respondents to revise strategy. They cite potential changes to monetary policy, Brexit and the US presidential election result as sources of heightened volatility in international markets. Planned changes show domestic equity and property as the largest expected net reductions, at -18% and -11%, with non-domestic equity down a net 8%. The 'other' matching asset class sees the highest planned increase, at 29%.
Decision-making rests mainly with pension boards of trustees, which hold responsibility for strategic asset allocation at 93% of respondents. Manager selection for all asset classes is also primarily the board's role, at 59%, with investment subcommittees (21%) and third parties (20%) playing active roles. In day-to-day investment decisions and rebalancing, third parties and investment subcommittees show the highest activity.
In the UK, where de-risking remains a central focus, 68% of respondents that are de-risking say they delegate the operation. Of those, 87% turn to a third party, 8% use an investment subcommittee and 5% use other methods.
The UK was the most heavily represented market in the survey at 48% of total assets, followed by Germany at 16%, Denmark at 12% and the Netherlands at 6%. Allocation patterns vary considerably by country. Belgian investors hold largely non-domestic equity (44%) and bonds (46%), with few alternatives, while French investors are weighted toward domestic equity (38%) and bonds (51%). Portuguese and Dutch investors have the highest bond exposure, at 65% and 60% respectively. Swiss and Italian investors hold the largest property allocations, at 23% and 20%, and Danish investors have a relatively high alternatives allocation, while Germany stands at 29% in that sector.
Mercer's authors note that changing risk tolerances and the global investment environment are prompting many respondents to revise strategy. They cite potential changes to monetary policy, Brexit and the US presidential election result as sources of heightened volatility in international markets. Planned changes show domestic equity and property as the largest expected net reductions, at -18% and -11%, with non-domestic equity down a net 8%. The 'other' matching asset class sees the highest planned increase, at 29%.
Decision-making rests mainly with pension boards of trustees, which hold responsibility for strategic asset allocation at 93% of respondents. Manager selection for all asset classes is also primarily the board's role, at 59%, with investment subcommittees (21%) and third parties (20%) playing active roles. In day-to-day investment decisions and rebalancing, third parties and investment subcommittees show the highest activity.
In the UK, where de-risking remains a central focus, 68% of respondents that are de-risking say they delegate the operation. Of those, 87% turn to a third party, 8% use an investment subcommittee and 5% use other methods.
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