Research - JUNE 13, 2018

Insurers and pension funds in U.K. and Continental Europe set to significantly increase allocation to alternative income assets

by Andrea Zander

Institutional investors in the United Kingdom and Continental Europe are boosting allocations to alternative income assets, such as infrastructure debt and equity, structured finance, real estate finance and private corporate debt, in the pursuit of stronger risk-adjusted returns and diversification, according to Aviva Investors.

The study, which surveyed more than 250 pension schemes and insurers in the United Kingdom and Europe, showed U.K. pension funds are planning the largest increase in allocations to alternative income, bringing their exposure closer in line with insurers in the United Kingdom, and pension funds and insurers in Continental Europe.

Key findings include:

  • U.K. pension schemes plan to increase their allocation to alternative income assets by 51 percent, from 4.3 percent to 6.5 percent.
  • U.K. insurers intend to raise allocations by 14 percent, from 7.3 percent to 8.3 percent.
  • In Continental Europe, insurers and pension funds are looking to increase allocations by more than 40 percent. Continental European insurers plan to allocate 9.2 percent of their portfolio to alternative income assets, up from 6.5 percent, while pension funds plan to raise their allocation from 5.2 percent to 7.3 percent.
  • The expected increase in allocations is driven by the downside protection alternative assets can offer (34 percent); diversification benefits (33 percent); and illiquidity premia (30 percent).
  • Most investors surveyed believe the best opportunities will be found outside their home markets.
  • Despite the trend towards increased allocations, common barriers to investment include: illiquidity (31 percent), the high cost of investing (29 percent), difficulty finding suitable opportunities (27 percent) and regulation (27 percent).


Popularity of different alternative income assets varies

Private corporate debt is the most commonly held alternative income asset class among insurers and pension funds, with 57 percent and 55 percent, respectively. The appetite for the asset class shows no signs of waning, with 42 percent of insurers and 26 percent of pension funds planning to increase their allocations within the next 12 months. Meanwhile, 31 percent of insurers plan to increase the holdings of infrastructure debt within the next three years, perhaps encouraged by more favorable capital treatment under Solvency II.

Mark Versey, CIO, real assets, Aviva Investors, said: “The appeal of the alternative income sector has grown significantly among European pension schemes and insurers over the past decade. Institutional investors have been lured by the illiquidity premium provided by private assets, as well as other benefits such as diversification and downside protection.

“As the era of quantitative easing finally winds down and interest rates rise, the survey highlights that investors are venturing into new sectors and geographies. This has also been borne out in our conversations with clients.”



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