Mercer is proud to present its 2009 asset allocation survey. This is our fourth pan-European survey, covering a representative sample of around 1,000 clients with assets of €400 billion. The figure represents a significant fall in assets from last year reflecting the challenging markets in which we and our clients continue to operate.

The survey provides:

• year-by-year comparisons of standard asset allocation information that form a comprehensive reference document for trends within the European pension industry
  
  
• an indication of how pension schemes in different countries are responding to topical issues

The major themes emerging from our survey this year include a continuing focus on risk management and recognition that good governance can improve the investment performance of institutional investors. The survey looks at a number of these themes in more detail, in particular:

• the continuing shift from equities to bonds
  
  
• the impact of pension scheme closure on strategic asset allocation
  
  
• the use of non-traditional asset classes to improve investment efficiency
  
  
• consideration of operational risks within the risk management framework
  
  
• improving scheme governance through the use of delegation

Key Findings

The move from equities to bonds: Our evidence shows that as defined benefit schemes mature, they reduce their exposure to equity markets. This is particularly true for those countries that have traditionally had a high allocation to equities. For example, in both Ireland and the United Kingdom the average “closed” scheme has a bond allocation that is around 10 percent higher than the average “open” scheme. Our survey suggests that this trend is likely to continue as nearly half of the schemes in Ireland intend to reduce their equity allocation over the coming year.

Using diversification to manage investment risk: In general, pension schemes across Europe are reducing their reliance on domestic assets and increasing their allocation to non-traditional asset classes. Schemes in the United Kingdom have tended to favour hedge funds, GTAA and active currency. In the rest of Europe, allocations to commodities and high yield bonds are more common. Looking to the future, the survey suggests that those trends are set to continue with additional allocations to a broader spread of alternatives.

Operational risks come under greater scrutiny: The financial crisis continues to have a significant impact on pension schemes across Europe. The first area to suffer was active management. Many active manager appointments were reviewed and not renewed following poor performance in a market that was driven by fear rather than fundamentals. The second casualty was the back office, with a number of high-profile financial collapses leading many schemes to review their cash and counterparty management processes. In many cases, counterparty risk and collateral management are high on the agenda for the coming year as more and more schemes include LDI, stock lending and various derivative strategies within their portfolios.

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