Asset allocation in Defined Benefit Pension Plans in Europe

Mercers each year publish a DB survey, which I get a copy of.

The 2012 results are quite interesting, not least from an Irish perspective. They survey over 1300 plans, covering 600b plus assets in europe as a whole.

First, Irish plans show the highest bias towards equities of all countries. However, this equity heavy position (which we share with the UK , not surprising given our similar national cultures : see here for some research on culture and pensions) is declining over time.

Second, breaking this down in more detail, we still display a very high degree of home bias in equities, with 15% of total assets in domestic equities.  Also, reflecting the financing structure of Irish corporations, the striking lack of investment in domestic corporate bonds is also very evident. Given that across Europe as a whole 7-10% of asset allocation to these instruments is not uncommon this seems to be a potentially untapped resource for irish corporate and a useful diversifier for irish pension funds

Third, its not all gloom (well, mostly) as there are some hardy souls who plan to INCREASE exposure to euroarea perioheries.

fourth, we are not badly off when we compare Irish pension fund assets per capita to other european countries. Bear in mind however that these assets need to yield a return for possibly 25  years on retirement and you see that this is relative. Without exception europe is grossly under pension provided.

Finally, despite the bull market, despite reams of research (here, here, here ), and despite there being an increase in asset allocation towards alternative investments, pension funds are leaving diversification opportunities on teh table in the form of not going into precious metal. While this may be included in the commodities section, the likelihood is that were it a significant amount then it would be broken out. Pension fund trustees might consider if it is truly safer to invest in forestry or global macro hedge funds than gold?

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