Smaller UK pension funds ‘more exposed’ to Brexit fallout

The findings, which highlight the impact of the negative interest rates in force in some areas, come as fears about the financial market impact if the UK votes to leave the EU sent the CBOE Market Volatility Index (Vix), aka the Fear Index, to its highest level in three months yesterday.

The new research carried out by consultants Mercer through its latest annual asset allocation survey, found that smaller UK pension funds are the most exposed to movements in the country’s equity markets and the pound linked to the forthcoming referendum on UK membership of the EU.

However, in a slight to chancellor George Osborne and other Treasury officials, Mercer’s European asset allocation survey, which includes investment information from nearly 1,100 institutional investors across 14 European countries, reflecting total assets of around €930bn (£739bn), also said “it’s not possible to know now with any certainty how the referendum will impact portfolios.”

Nathan Baker, principal in the consultancy’s investments business, said: “Although it’s not possible to know now with any certainty how the referendum will impact portfolios, a typical small UK plan is more UK-centric, more exposed to movements in sterling versus other currencies, and is managed in a less dynamic fashion.”

Mercer said within bond portfolios there had been a shift away from low- or negative-yielding domestic government bonds towards higher-yielding non-domestic and/or corporate bonds.

Governments in countries such as Switzerland and Japan recently issued bonds which were set to repay less at maturity than investors paid for them following moves by central banks to cut rates to below zero per cent to encourage investors to spend more.

Funds may buy such bonds because their mandates require them to invest in certain asset types.

Mercer said institutional investors had been taking a long-term view in relation to emerging markets, in marked contrast to the behaviour of retail investors since 2013.