EUROPE - Pension funds across Europe are continuing to shy away from equity investments despite last year's recovery of the global equity market.

More than 1,000 defined benefit scheme responded to Mercer's European Asset Allocation Survey 2010. And the consultancy has claimed, based on this analysis, that many pension funds are also becoming "more proactive" in their search for new investment opportunities, with fund of hedge funds space seen as one of the areas where they are looking to invest.

Pension funds in both the UK and the Netherlands are thought to have reduced their equity holdings by almost 10 percentage points since 2008, while German Pensionskassen have cut their equity stakes to just 3%, down from 19%, in the same period.

This trend looks set to continue as over a third of European respondents, excluding the UK, told Mercer they were looking to further reduce their domestic equity holdings over the next year.

This shift away from equities led German Pensionskassen to reinvest heavily in bonds, and more than four-fifths of their assets under management are now part of this low risk category. At least 88% of assets were invested in domestic government bonds.

Similar developments were seen across Europe in general, as a net 12% of UK pension schemes are looking to increase their share of domestic government bonds and 32% of funds in other European countries are planning to do the same. Only 5% of respondents said they were looking to cut back on investments in domestic government bonds.

Despite renewed focus on fixed income, Crispin Lace, senior investment consultant at Mercer, said DB schemes were still looking to try new investments.

"It certainly appears that plans have become much more proactive and are seeking investment opportunities," he argued, while stressing many were "looking out around the market for new ideas and trying to exploit them."

The new categories under consideration include distressed properties, and 5% of funds said they have already investing in this new field, as well as in convertibles.

Looking at the other alternative asset classes, figures suggest funds of hedge funds were being considered by over 18% of respondents, attracting the most interest by far, followed by interest in emerging market debt among 14%.

Real estate in the UK is also expected to see increased interest, as almost 15% of UK DB pension schemes are thinking of increasing their stake in commercial properties.

Lace speculated that this would see some schemes increase their property holdings to 10% of all assets.

While much of the study looked specifically at asset allocation, the survey also highlighted the problems UK pensioners faced. It found just 27% of responding DB schemes were still open to new entrants, compared to 90% in the rest of Europe.

And whereas most of the survey examined European DB schemes, Mercer also investigated the investment strategy of around 250 defined contribution schemes. It found almost 84% of all assets were invested in equities, split almost equally between domestic and overseas shares.

The consultancy did speculate, however,  that these relatively young DC schemes will eventually adopt a more diversified investment approach, as has been the case in the United States, where more than four-fifths of DC schemes are more than 10 years old, compared to only 34% and 27% in the UK and Europe respectively.

If you have any comments you would like to add to this or any other story, contact Julie Henderson on + 44 (0)20 7261 4602 or email julie.henderson@ipe.com

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