European pension schemes have increased their allocation to liability hedging – or liability-driven investments (LDI) – from 15% to 26% over the past year, according to research from consultancy Mercer Investments.
LDI is becoming common in the UK and the Netherlands, findings from the annual European Asset Allocation Survey show.
Also, nearly half of the 1,200 European pension funds Mercer surveyed say they allocate to invest in alternatives. In the UK alone, 75% of pension schemes invest in alternatives.
The consultancy’s UK head Pat Race says ultra-loose monetary policy, negative real interest rates and a range of unsolved economic issues, pose challenges for pension funds that need to generate real positive returns.
“In response, investors are expanding their investment tool kit, making their strategy more dynamic, and are introducing scenario and stress test analysis into the risk management process,” Race says.
Meanwhile, the average equity allocation fell from 43% to 39% over the past year, compared to 68% reported a decade ago. Traditionally one of the most equity-heavy in Europe, the UK pension sector ranks now behind Ireland, Belgium and Sweden in terms of equity exposure.
Growth-oriented fixed income, including emerging market debt and high yield debt, as well as diversified growth funds have become popular investments among European pension funds. Both asset classes are found in 20% of the funds.
Mercer predicts the trend away from equity assets to continue, with around 30% of schemes stating they plan to reduce their domestic allocation and almost a quarter stating they plan to reduce their non-domestic equity exposure.
Conversely, they look to increase allocations to inflation-linked bonds, corporate bonds and LDI strategies in order to manage liability-relative risks.
Combined, the 1,200 European pension funds surveyed have assets under management of €750 billion.
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