Mercer is proud to present our 2012 European Asset Allocation Survey.

This year our survey covered over 1,200 plans from 13 countries, with total assets of over €650 billion. In this year's survey we continued to see a fall in equity allocations, though plans did not, in general, make a significant shift towards bonds. Against a backdrop of continued equity market volatility, pension schemes have been considering an increasingly broad range of alternative asset classes, with 50% of schemes now holding an allocation to alternatives, up from 40% last year.

Key findings:

EQUITY WEIGHTS CONTINUE TO MOVE LOWER

The eurozone crisis, combined with broader concerns over the fragility of the economic recovery, has served to strengthen investors’ desire to control equity-based volatility without sacrificing long-term returns. In this search for diversifying return streams, pension plans in Europe have focused their attention on alternative asset classes.

FLOW TO BONDS SLOWS: INCREASED RELIANCE ON TRIGGER LEVELS

Supported by large purchases by central banks and repeated flights to safety by investors, sovereign bond yields in most major developed markets are now at extremely low levels. It is perhaps understandable, therefore, that pension plans have, in aggregate, avoided further increasing their allocations to traditional bond assets over the past year. However, many plans have put in place trigger-based approaches to increasing bond allocations.

MOVES TO ALTERNATIVE ASSET CLASSES, SOME "PARKING" IN CASH

Alternative asset classes have continued to interest pension plans, given their relative attractiveness compared to low-yielding government bonds as well as their appealing diversification characteristics. In addition, the strength of many emerging economies has encouraged asset flows into these markets, and a significant number of plans are now making allocations to emerging markets via both equity and debt mandates. There is also evidence that plans’ cash balances have risen, presumably reflecting the significant uncertainty in the global economy – particularly within the eurozone region.

EQUITY WEIGHTINGS: UK AND IRELAND CONVERGE WITH CONTINENTAL EUROPE

The traditionally equity-heavy markets of the UK and Ireland continue to have the highest equity weightings (c. 44%), but the gap versus other European countries has narrowed substantially since we began to monitor the trend. Other countries, such as Belgium and Sweden, have comparable equity weightings (at just below 40%). Indeed, it appears that the past decade has seen a convergence of the UK and Irish equity-driven approach to pension investment with the continental European approach.

BIGGER PENSION PLANS: MORE DIVERSIFIED AND LESS IN EQUITIES

Perhaps not surprisingly, given their typically greater governance budgets, larger plans have less reliance on equity exposure and utilise a range of asset classes to access a more diversified set of return drivers. An increasing degree of asset-class diversification is also noticeable in relatively small plans, while the lower equity allocations are most apparent in the very largest plans.

DOMESTIC EQUITY BIAS CONTINUES TO FALL

Reductions in equity allocations have, as in previous years, tended to come more from the domestic allocation. This reflects the wider trend towards greater diversification across all parts of the investment strategy, with investors shifting towards global equity mandates, often incorporating an allocation to emerging markets. We have also seen a number of plans introduce a more defensive component to their equity portfolios in order to mitigate the impact of equity market volatility.

INFLATION REMAINS A CONCERN FOR MANY INVESTORS

Given the extent of central bank monetary easing in the developed world, many investors remain concerned about the potential erosion of returns through the future re-emergence of inflation. Indeed, many investors expect to increase their allocations to inflation-linked bonds over the next 12 months.