Irish pension schemes have reduced their equity allocations by almost a third in the past three years according to Mercer, as they diversify into fixed income and real assets (property and infrastructure) as new sources of returns.
Mercer’s 2020 European Asset allocation insights* shows average equity allocations for Irish defined benefit (DB) schemes fell to 27% this year, compared to 39% in 2017. Allocations to fixed income investments like corporate bonds over the same period have risen from 48% to 50%, whilst the allocation to alternative assets like property, private equity and infrastructure has doubled to 22% from 11%.
The 18th edition of the report, surveyed 927 institutional investor clients across 12 countries, reflecting total assets of around €1.1 trillion, including over €20bn invested by Irish pension funds. Mercer’s annual survey provides a comprehensive overview of investment strategies across the European pension industry, identifying emerging trends in institutional investor behaviour.
The trend of reduced equity allocations is reflected more widely by investors across Europe and the UK, with the average equity holding falling to 22% this year (from 25% in 2019). Instead, investors have increased allocations in 2020 to growth-oriented fixed income (+10%), private equity (+6%) and real assets (+4%) compared to 2019, in an attempt to diversify schemes and deliver greater returns.
Another notable trend is the reduction in the number of investors across Europe reporting an allocation to hedge funds. Over the last decade, hedge funds have tended to fall out of favour, as they have struggled to justify their relatively high fees, investment complexity and lower liquidity. Increasingly, investors are looking for other routes to access non-traditional asset classes. In Ireland, exposure to hedge funds is now at 2.1% compared to 1.3% three years ago (2017).
Olivier Santamaria, Head of Investment Consulting for Mercer (Ireland) Limited, said: “With investors facing high levels of uncertainty for the rest of 2020 and pending the outcome of the tug of war between poor economic fundamentals on the one hand and financial markets expectations of a strong recovery on the other, risk management remains a key priority. We expect schemes to continue focusing on building more robust portfolios through increased diversification and better matching of the liabilities. In periods of high volatility, some investors may be ready to be more opportunistic as market dislocations often present an attractive entry point for those prepared to ride out short-term volatility.”
European pensions funds’ awareness of, and desire for, action on climate change related investment risk has surged, according to this year’s report, with 54% of those surveyed now actively considering the impact of such risks in their investment allocations, compared to just 14% in 2019. Sustainability is gathering momentum among European institutional investors, with 89% of schemes now considering ESG risks as part of their investment decision-making, up from 55% in 2019. Through its regular Investing in a Time of Climate Change report, Mercer has been engaging with clients on this topic, and the firm expects the trend to continue as more schemes consider the potential portfolio impacts of climate change over the coming years.
Rob Meaney, Senior Investment Consultant at Mercer, said: “ESG factors should be actively integrated into all areas and decisions relating to investment strategy. We have seen a strong increase in ESG risk awareness on the part of insitutional investors, including the impact of climate change This awareness continues to emerge as more schemes and company sponsors witness how ESG risks in their portfolios can impact investment returns and how the company and scheme is perceived by the public.”
While regulation continues to drive investors’ concern with ESG risk (85%), Mercer’s research shows that a growing number are driven by the potential impact on investment returns (51%, up from 29%). Forty percent of schemes also cited the desire to mitigate potential reputational damage as a reason to consider ESG risks, and 30% noted the wish to align with the sponsoring company’s existing corporate responsibility strategies.
The hit to markets following the COVID-19 pandemic came after the data collected for this year’s research, however the survey results are expected to be largely unchanged due to the effect of both rebalancing policies and market recovery. Olivier Santamaria concluded: “While the long-term impact of COVID-19 has yet to fully play out, it is already clear that investors will need to become more deliberate in seeking to generate sufficient returns in a low yield environment, while retaining a sharp focus on risk management and on governance to navigate what is likely to remain a highly uncertain and volatile environment.”
Notes for the Editor
*Mercer collected the latest available data from its institutional client base during Q4 2019 and early Q1 2020 to analyze and release in mid-2020. The COVID-19 impact has therefore not influenced the data collected; however, Mercer does not believe asset data will have changed drastically due to market uncertainty as investors are seen to be continuing with the same long-term strategic decisions.
Mercer believes in building brighter futures by redefining the world of work, reshaping retirement and investment outcomes, and unlocking real health and well-being. Mercer’s more than 25,000 employees are based in 44 countries and the firm operates in over 130 countries. Mercer is a business of Marsh & McLennan (NYSE: MMC), the world’s leading professional services firm in the areas of risk, strategy and people, with 76,000 colleagues and annual revenue of $17 billion. Through its market-leading businesses including Marsh, Guy Carpenter and Oliver Wyman, Marsh & McLennan helps clients navigate an increasingly dynamic and complex environment. For more information, visit www.mercer.ie. Follow Mercer on Twitter @MercerIreland.
Mercer (Ireland) Limited, trading as Mercer, is regulated by the Central Bank of Ireland. Registered Office: Charlotte House, Charlemont Street, Dublin 2. Registered in Ireland No. 28158.