UK pension funds expected to wade into alternatives

UK pension funds are preparing to “significantly increase” their allocation into alternative income assets, Aviva Investors has found.

The research, which surveyed over 250 pension schemes and insurers, found that UK pension funds are set to increase allocation into alternative income assets to 6.5 per cent, up from 4.3 per cent, a 51 per cent increase.

On the continent, pension funds are looking to increase their allocation by 40 per cent, from 5.3 per cent to 7.3 per cent.

Aviva Investors chief investment officer for real assets, Mark Versey, 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.”

Versey added that as the era of quantitative easing winds down, investors are venturing into new sectors and geographies.

Of the most popular alternative assets, private corporate debt is the most commonly held with 55 per cent of pension funds subscribing, with 26 per cent of pension funds planning to increase allocations over the next 12 months.

According to Aviva, 34 per cent of pension funds are driven to alternative assets by the downside protection they offer, 33 per cent by diversification benefits and 30 per cent illiquidity premia.

Furthermore, 33 per cent said illiquidity was the most common barrier to investing, 29 per cent said the high cost of investing, 27 per cent said a lack of suitable opportunities and 27 per cent said regulation was a barrier.

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