Tom Geraghty, European head of Mercer’s investment consulting business said: "The banking crisis and collapse of Lehman Brothers highlighted the operational risks associated with the investment of institutional assets and brought counterparty credit risks more into focus. Funds are now looking at ways to manage the risk inherent in their schemes, mainly through further diversification of their assets."
The survey found that the steady reduction in benchmark allocations to equities in markets with traditionally high exposures was accelerated by last year’s market turmoil. In the UK the allocation fell from 58 per cent in 2008 to 54 per cent in 2009 and in Ireland from 67 to 60 percent.
The UK has also seen a signification decline in allocation to domestic equity over the last few years, from 57 per cent of the total equity allocation three years ago to 51 per cent in 2009. Exposure to equity markets remained low across other European markets.
Crispin Lace, principal at Mercer said: "Both in the UK and Ireland the move away from equities is driven by both the market downturn and the increasing maturity of schemes. 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 dominant asset class in most European countries, an increasing number of funds are diversifying to non-traditional investment opportunities. Allocations to alternative asset classes have increased from 10 to 11 per cent in Germany, from 9 to 11 per cent in the Netherlands and from 4 to 6 per cent in the UK.
In the UK, schemes favour hedge funds, GTAA and active currency. The percentage of schemes that had some form of strategic allocation to one or more of these opportunities varied from 5 – 9 per cent depending on the asset. Over 50 per cent more UK schemes have allocated to these asset classes since the 2008 survey.
According to the report, in the rest of Europe, schemes favour hedge funds (14 per cent of schemes have an allocation), commodities (12 per cent) and high yield bonds (10 per cent).
Allocation to alternative assets: UK
Allocation to alternative assets: Europe ex UK
Lace said: "The pattern of allocation to non-traditional asset classes varies from market to market, due both to historical trends and preferences and to the level of sophistication of investors."
In both the UK and Ireland, 33 and 47 per cent of schemes respectively have indicated they are planning a further decrease in equity exposure over the next 12 months. Irish schemes are looking to couple this with an increase in exposure to both government bonds (34 per cent of schemes) and non-government bonds (12 per cent).
UK schemes envisage a different approach with 27 per cent of schemes planning an increase in allocation to corporate bonds at the expense of government bonds where 18 per cent plan to reduce their exposure.
Percentage of UK and Irish schemes planning to change strategy
Earlier this year the UK’s second-largest pension fund, the Universities Superannuation Scheme (USS) confirmed its commitment to double exposure to alternative assets to 20 per cent.
As the Mercer findings suggests USS is not the only pension scheme that has adopted an adventurous policy towards alternatives.
A number of UK public pension funds are also maintaining significant exposure to alternatives: Pension funds still seek the 'alternative' way.