De-risking sees European pension assets move to bonds from equities

07 September 2017 4 min. read

De-risking has seen European pension investment shift dramatically from equities into bonds and alternative assets, according to research by Mercer. The latter class has grown from 3% of assets to more than 20% over the past decade. UK investors, meanwhile, continues to focus on de-risking their portfolios.

The latest ‘European Asset Allocation Survey’ from consulting firm Mercer explores various trends within major European pension schemes by country. The report is based on a survey of 1,211 institutional investors across 13 countries, with total assets valued at €1.1 trillion.

Split of total assets by country

The paper found that the UK was the most represented within the survey in terms of total assets, at 48%, followed by Germany on 16%. Denmark and the Netherlands came third and fourth respectively, with a share of 12% and 6% of assets respectively. The remainder have relatively smaller shares of total investment, accounting for around 15% of the total sample.

Strategic asset allocation by country

In terms of allocation of assets, different countries are diversified in relatively different ways. Belgium-based investors surveyed, for instance, largely have non-domestic equity (44%) and bonds (46%), with a small number of alternative assets. In France, surveyed investors are more focused on domestic equity (38%) and bonds (51%).

Analysts also found that investors surveyed in Portugal and the Netherlands have the highest level of bon exposure, at 65% and 60% respectively. While Swiss and Italian investors are the most keen on property of the surveyed group, at 23% and 20% respectively. Danish investors have a relatively high level of alternative investments, while Germany comes in at 29% for the sector.

Change in investment strategy

Researchers noted that the current global investment environment for pension schemes, and their respective risk tolerances, means that various respondents are planning to change investment strategy. Potential changes to monitory policy, as well as Brexit and the US Presidential election result, are further highlighting increased volatility in international markets.

De-risking Operations

Meanwhile, the authors of the paper project domestic equity and property as likely to see the biggest negative movements, at a net -18% and -11% respectively. Non-domestic equity is likely to see a fall of -8%. Domestic inflation-linked government bonds and domestic fixed interest government bonds are set to see significant growth, meanwhile, up a net 28% and 17% respectively. The ‘other’ matching asset class sees the highest level of planned investment, at 29%.

Breakdown of investment cycle responsibility

The research considered the key decision makers for investment cycles at the firms surveyed, finding that, in general, the main board of trustees bears responsibility. In the case of strategic asset allocation, the group is the most representative at 93%. Growth to matching switches also ranks highly in their favour at 70%, followed by 11% investment subcommittee and 19% a third party.

The manager selection for all asset classes tends to be the main board or trustee at 59%, although investment subcommittee and third parties are also active, at 21% and 20% respectively. Third parties were found to be most active in day to day investment issues and decisions on rebalancing, at 27% each, while investment subcommittees are the most active in the same categories, at 28% and 23% respectively.

De-risking delegation

The research asked UK respondents about how they are de-risking their operations – in the face of increased global risks. For companies leveraging de-risking, 68% said that they are delegating the de-risking operation. Of those delegating, 87% turn to a third party, 8% leverage their investment subcommittee, while 5% use other methods.