The latest William M Mercer survey of the European pensions market confirms that the grip of the bond culture is still the dominant force, writes Fennell Betson

The assets of the pensions market in Europe are now around $2.8 trillion, according to the 1997 review issued by the investment consulting practice of William M Mercer. But the rise of one third over the $2.1 trillion in the previous report is deceptive, as for the first time pensions assets figures are given for France, Italy, Norway and Sweden, which between them add $533m to the total. Net of this, the rise is a more modest 9%.

Spanish and Portuguese assets showed a very healthy growth of around 30%, even though assets in both countries are rising from a low base following the relatively recent introduction of funded pensions. Ireland also saw a strong growth in pensions assets which rose by 24% to $21bn. The assets of Europe’s largest funded pensions market, the UK, rose by nearly a fifth to $862bn, while Swiss assets rose 5% to $320bn and Dutch by a mere 1% to $428bn. Germany’s pensions assets saw a 2.9% rise to $360bn.

The study points to the need for much more funding of pensions. Some estimates suggest that if the pensions promises were to be capitalised and included in the national debt, then the public debt in Europe would double as a percentage of gross national product.”

Though the figures given in the study for the “average” asset allocation in the different countries make as compulsive reading as ever, there are a number of discrepancies between those for this year and the previous study, making short-term inter-temporal comparisons difficult in some countries.

The main lesson is that the shift to real assets is slow and that the grip of the bond culture is still the dominant force. But the figures do pick up the move in the UK to reduce equity exposure, with higher holdings of cash and bonds and the further push of Irish funds into foreign equities.

The study comments that the concentration in domestic bonds could be regarded as a decision to minimise asset volatility, particularly where book values are used for bonds. There is evidence that more funds are moving to the less conservative approach of more liability-based asset allocation, by switching into equities and foreign assets, it says.

The sweeping global changes hitting the fund management sector involved in the pensions area are picked up by Mercer. The increasing presence of US managers in the pension market is firmly established as a trend. The portfolios they manage were up by 40% over the year. The restructuring within the industry has meant, says Mercer, that over the past year there have been 27 major changes of ownership of groups monitored. Over half of these involved cross-border tie-ups.

Another international trend is the use of specialist managers. Not only has the number of specialist managers grown, but the number of specialist mandates was up by over a fifth compared with the previous year. “The fastest growth in mandates has been in emerging markets, Japanese equities, US equities and European bonds,” says Mercer. Over the five years that the reports have been issued, the number of specialist mandates had doubled.

The study finds that the top five managers in terms of specialist mandates are Pictet & Cie (43 funds), Danske Capital Management (37), Capital International (33), Barclays Global Investors (27) and Morgan Grenfell (24).

Altogether the study covers the activities of 167 managers operating in 20 countries. It looks at the pensions and market situation in 14 of these and profiles each of the managers.

The European Pension Fund Managers Guide, published by William M Mercer; details from Barbara Burnett, tel +44 171 222 9121”

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