European pension plans are increasing their allocation to non-traditional asset classes to manage their risks more effectively, a survey reveals.
Mercer’s latest European Asset Allocation survey of over 1,000 European pension funds with assets of €400 billion found that 35% of U.K. schemes and 60% of European schemes expect to try new investment strategies to help manage future investment risk.
Plunging equities markets since the outset of the global financial crisis have resulted in a fall in U.K. asset class allocation from 58% in 2008 to 54% in 2009, and in Ireland from 67% to 60%.
“Both in the U.K. and Ireland, the move away from equities is driven by both the market downturn and the increasing maturity of schemes,” says Crispin Lace, a principal with Mercer. “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 around 10 percentage points higher than the average open scheme.”
While bonds continue to be the most popular European asset class, the survey reveals that an increasing number of funds are diversifying to non-traditional investment opportunities. Allocations to alternative asset classes have increased from 10% to 11% in Germany, from 9% to 11% in the Netherlands and from 4% to 6% in the U.K.
Mercer’s report states that institutional investors in the U.K. currently favour hedge funds, global tactical asset allocation and active currency. The percentage of plans that had some form of strategic allocation to one or more of these approaches varied from 5% to 9%, depending on the asset.
Interestingly, the survey reports that over 50% more U.K. plans have allocated to these asset classes since the 2008 survey. As for the rest of Europe, plans favour hedge funds (14% of plans have an allocation), commodities (12%) and high yield bonds (10%).
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