- Irish pension schemes continue to reduce allocation to equities and diversify into property, infrastructure and hedge funds as new sources of returns
- Over half (55%) of European pension schemes consider ESG risks as part of their investment decision-making, up 15% from 2018.
- 56% of European schemes say regulation is the key driver behind the rise in ESG consideration
Mercer’s 2019 European Asset Allocation survey – the 17th edition – surveyed 876 institutional investor clients across 12 countries, reflecting total assets of around €1 trillion. Mercer’s annual survey provides a comprehensive overview of investment strategies across the European pension industry, identifying emerging trends in institutional investor behaviour.
According to the 2019 report, average equity allocations for Irish defined benefit schemes have fallen and now stand at just 28% compared to 34% in 2018. Bond allocations remain broadly at 50%, while allocations to alternative assets (such as property, infrastructure and hedge funds) have continued to increase from 15% up to 22%.
This trend is reflecting more widely by investors across Europe and the UK, with the average equity holding falling to 25% this year (from 28% in 2018). Instead, investors have increased allocations to real assets including property and infrastructure (4% increase) and hedge funds (6% increase) in an attempt to diversify schemes and deliver greater returns.
Sustainability is also gathering momentum among European institutional investors, according to the report, with 55% of schemes now considering environmental, sustainable and governance (ESG) risks as part of their investment decision-making, up from 40% in 2018. Over half (56%), cited regulatory pressures as the main reason for this increased focus. Mercer expects this trend to keep strengthening as a result of the introduction of the 2017 European Pensions Directive, IORPII, and the UK Department of Work and Pension (DWP) Investment Regulations coming into force in October 2019. These will require pension funds to take ESG factors (including climate change) into account when making investment decisions.
Olivier Santamaria, Head of Investment Consulting, for Mercer (Ireland) Limited, said: “While 2019 has so far been marked by cautious optimism, investors need to remain vigilant in an ever-evolving macro-economic and political backdrop. In the past year, Irish pension funds have reduced their exposure to equities, diversifying into other asset classes including property, infrastructure and hedge funds.
Mounting evidence of overextension of credit means investors should continue to position their portfolios to weather possible market volatility, in the face of political uncertainty and diminished liquidity as Central Banks reign in their market involvement. We expect the increasing focus on sustainability to continue and anticipate ESG factors will become an integral part of investment strategy setting and risk management.”
Regulation is identified as the main reason for ESG inclusion in investment decision-making, schemes highlighted a number of other factors driving this growing trend. Mercer’s research revealed that 29% of schemes (up from 25% in 2018) are now considering ESG risks as a result of the perceived benefits on risk and return of their investments. Another 29% (up from 18% in 2018) said that they now do so to mitigate potential reputational damage. This indicates that schemes increasingly recognise the link between positive company ESG risk metrics and improved corporate performance.
While only 14% of respondents indicated that decisions are being driven by the challenges posed by climate change (down slightly from 17% in 2018), Mercer has been increasingly engaging with clients on this topic following the launch of their updated Investing in a Time of Climate Change report and expect to see more schemes considering the potential portfolio impacts of climate change over the coming year.
Tom Geraghty, European Zone Leader for Mercer, said: “The requirement to show active stewardship and engagement with business is moving up investor agendas as they come under greater scrutiny. The UK’s DWP regulations and the European Pensions Directive are driving increased engagement and disclosure on these critical topics and we expect this trend to continue. Looking ahead, more asset owners and investment managers are likely to incorporate sustainability as an integral part of the strategic investment process. Pension schemes that haven’t yet given sustainability sufficient consideration and focus should consider doing so in the near term to ensure they are acting in the best interest of their members.”
Notes to Editors
Mercer delivers advice and technology-driven solutions that help organisations meet the health, wealth and career needs of a changing workforce. Mercer’s more than 23,000 employees are based in 44 countries and the firm operates in over 130 countries. Mercer is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), the leading global professional services firm in the areas of risk, strategy and people. With nearly 75,000 colleagues and annual revenue over $17 billion, through its market-leading companies including Marsh, Guy Carpenter and Oliver Wyman, Marsh & McLennan helps clients navigate an increasingly dynamic and complex environment. For more information, visit www.mercer.com.
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