The Bank of England (BoE) has published a discussion paper which examines trends in the investment decisions of insurance companies and pension funds.

According to the study, which was produced in conjunction with a group of academics and industry practitioners, UK defined benefit (DB) pension funds have behaved countercyclically in the short-term.

Over the medium-term a structural "de-risking" trend, where funds shifted investment allocations from equities to fixed income instruments, has dominated, the BoE said.

The bank described life insurance companies and pension funds (ICPFs) as "important financial intermediaries", especially since they manage nearly £3trn of assets in the UK alone.

The way ICPFs manage the investments that they make on behalf of individuals is "critical" for individuals and the economy as a whole, as they have the potential to provide long-term investment to the real economy and to act as a stabilising influence on the financial system by buying and holding assets across the economic cycle.

The study revealed that over the long-term, the nature of investments by ICPFs has changed over the past 15 years.

Their decrease in their holdings of particularly UK equities was described as "particularly striking" by the members of the Procyclicality Working Group, as the proportion of UK shares owned by UK ICPFs fell from over 50% in the early 1990s to just over 10% in 2012.

The study found that these structural trends are relevant to the willingness of ICPFs to bear risk in the longer term and are potentially significant for the appropriate allocation of capital in real economy.

The authors of the study found that ICPF behaviour was influenced in particular by the underlying structure of their liabilities, regulation, industry practices, and accounting and valuation methods.

First published 31.07.2014

monique_simpson@wilmington.co.uk