UK and Irish funds setting their own benchmark allocation continue to have considerable exposure to equities (62% and 60%, respectively), whilst equity exposure in other countries ranges between 28% and 40%.

Continental European funds have correspondingly higher allocations to bond markets, with Dutch funds holding 63% in bonds. 

2. UK Funds

Changes in the UK pension fund liability profile

There continues to be little change to the overall liability profile of clients in the survey. The proportion of liabilities relating to active members remained unchanged from last year, at 41%, despite the fact that 61% of schemes are now closed to new entrants.

Changes in asset allocation

UK funds continue to reduce their equity exposure (from 63% down to 62% over 2005), but the reduction remains small at one percentage point, on average. The average equity allocation of UK funds has reduced by 6% over the last three years, i.e. at a rate of 2% per annum (68% in 2003 to 62% by 2005).

Domestic equity allocations continue to reduce (59% of equities to 57% over 2005) at the expense of international equity investment, with one in five funds now hedging part of their currency risk.

The average allocation to bonds remained at 35%.

Use of Alternatives

Unsurprisingly, property is the most popular alternative to equities and bonds, with 25% of funds having some allocation. Other popular alternatives show 7% of funds now invest in hedge funds and 7% employ an active currency manager.

Anticipated changes to investment strategy

There is likely to be a significant further increase in the use of alternatives, especially hedge funds, active currency management and TAA, with less growth in private equity.

One in ten funds is expected to consider introducing some form of liability benchmarked strategy, split equally between those implementing a passively managed swap strategy (either an overlay strategy or in place of traditional bonds mandates) and those implementing actively managed liability benchmarked strategies, or 'LDI plus', type mandates. 

3. Continental Europe and Ireland funds

Asset allocation

Of the European funds included in the survey over 20% use a peer group benchmark for setting asset allocation. Use of the peer group is higher in Ireland (39%) and Portugal (92%), whilst fund specific benchmarks are used by virtually all funds in Germany, the Netherlands, Switzerland, Spain and France.

Excluding those adopting a peer group benchmark, the average asset allocation is 40% in equities, 50% in bonds, and 10% in other assets.

Use of alternatives

As in the UK, property is by far the most popular alternative to equities and bonds (62%). However exposure varies by country: virtually all Irish funds have exposure to property, 68% of Swiss funds have exposure, whilst 41% of Dutch funds invest in property.

The survey also found that 13% of funds have exposure to hedge funds, although again this varies by country – 13% of Irish funds invest in hedge funds and over 25% of Swiss funds invest a proportion of their assets in hedge funds, whilst Dutch funds typically have no exposure to hedge funds.

Anticipated changes to investment strategy

Over the next year investment in hedge funds, active currency management and TAA are expected to increase significantly across Continental Europe and Ireland.

If you have any questions about the survey, or would like a hardcopy, please contact Karen McGregor.  

Mercer is a leading global provider of investment consulting services, and offers customized guidance at every stage of the investment decision, risk management and investment monitoring process. We have been dedicated to meeting the needs of clients for more than 30 years, and we work with the fiduciaries of pension funds, foundations, endowments and other investors in some 35 countries. We assist with every aspect of institutional investing (and retail portfolios in some geographies), from strategy, structure and implementation to ongoing portfolio management. We create value through our commitment to thought leadership; world-class, independent research; and top-notch consultants with local expertise.