European Plans Show Steady Equity Allocation Reductions

April 21, 2009 ( - European pension plans are increasing their allocation to non-traditional asset classes to more effectively manage their risks, according to a new Mercer study.

A Mercer news release about its European Asset Allocation Survey, which covered more than 1,000 European pension funds with assets of €400 billion, found that 35%of UKplans and 60%of Europeanplansexpect to introduce new investment opportunities to help manage future investment risk.

The steady reduction in benchmark equity allocations in markets with traditionally high exposures was stepped up by last year’s market turmoil when, in the U.K. the allocation fell from 58%   in 2008 to 54%in 2009, and in Ireland from 67%to60%. Mercer said the U.K. has also seen a signification decline in allocation to domestic equity over the last few years, from 57%of the total equity allocation three years ago to 51%in 2009.

“Despite being innately diverse in history, culture and regulatory requirements, European pension funds have all felt the effect of the last year’s market turmoil.” Said Tom Geraghty, European head of Mercer’s investment consulting business, in the news release. “Funds are now looking at ways to manage the risk inherent in their schemes, mainly through further diversification of their assets.”

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 Mercer said.    Allocations to alternative asset classes have increased from 10 % to 11%in Germany, from 9%to 11%in the Netherlands, and from 4% to 6%in the U.K.

Turbulent markets are prompting broad and deep reviews of all aspects of pension policy. Over two thirds of respondents have either undertaken investment related reviews in 2008 or said they intended to do so in 2009, Mercer said.

In both the U.K. and Ireland, 33%   and 47%ofplans,respectively, have indicated they are planning a further decrease equity exposure over the next 12 months. Irishplansare looking to couple this with an increase in exposure to both government bonds (34%of plans) and non-government bonds (12%).