European Pensions Cut Illiquid Exposure

Long-term, illiquid assets were once a staple for investors but they may have lost their appeal.

(December 14, 2012) — European pension funds have been scaling back their allocation to illiquid investment in favour of more easily tradable assets, a report from the region’s supervisory authority has shown.

The European Insurance and Occupational Pensions Authority (EIOPA) published its report on the second half of the year today, revealing the results of its local members’ observations on behavioural changes in the past 12 months in the 17 states with major institutional investors.

Of the 17 states, nine members agreed with the statement that “undertakings increase the relative share of liquid investments while reducing the relative share of illiquid investments”. Only three members “somewhat” disagreed and none agreed entirely. The remainder had no opinion.

The question whether pension funds were reducing exposure to sovereigns with higher credit spreads was the only statement better supported. This received agreement from 10 members and disagreement from four.

The member panel was split on whether investors had been moving out of equities to relatively less risky fixed income securities.

The results may be a blow to some politicians who had been banking on institutional investors to help fund large infrastructure projects across the continent, as public and bank funding has dried up since the onset of the financial crisis.

In the UK, the government had earmarked several billion pounds’ worth of projects that could be underwritten by pension funds in the country.

The National Association of Pension Funds and the Pension Protection Fund in the UK have also launched a platform to unite large investors who want to invest in infrastructure projects.

Paul Kemmer, head of asset solutions at consulting firm P-Solve, said turbulence in financial markets could lead to investors shedding illiquid assets to become more nimble, but it could also mean they would search for assets that are not linked with corporate success, as is the case with equities and bonds.

Kemmer said pension fund portfolios were a natural home for illiquid securities, such as real estate and infrastructure, but investors should demand a premium for taking on such projects and deal with each opportunity on a case-by-case basis.

The EIOPA report is backward looking and investors may have since changed their mind. Last month almost half of a group of European institutional investors responding to a survey by consulting firm Towers Watson said one of the top priorities on their to-do list for 2013 was to explore how to exploit liquidity premia.

One of the UK’s largest pension funds, the Universities Superannuation Scheme, has built an in-house infrastructure team. Several large European asset managers have made similar moves citing requests from the market.

Conversely, the EIOPA report showed insurance companies were seen to be moving into more illiquid assets and shifting further into fixed income.

For the full EIOPA report, click here.

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