MQ5: Investment by Insurance Companies, Pension Funds and Trusts: Q3 2014

• Total net investment by insurance companies, pension funds and trusts is estimated at £23 billion in the third quarter of 2014, higher than the five-year quarterly average for this series (£14 billion) and higher than net investment in the previous quarter (£11 billion)
• Net investment in British government securities (gilts) in Q3 2014 is estimated at £8 billion. This is the eighth successive quarter of net investment in gilts, indicating that some businesses (particularly pension funds) are continuing to avoid the relative volatility of equity markets
• In Q3 2014, net investment of £3 billion in overseas securities contrasted with net disinvestment of £2 billion in UK corporate securities. This continuing trend may indicate that businesses have more confidence in their ability to make money from overseas securities than they do from UK corporate securities
• This release reports on these institutions’ balance sheets at the end of 2013. Total assets were valued at £3,473 billion compared with £3,284 billion at the end of 2012, an increase of 6%
• In 2013, net investment in short-term assets of £25 billion was the highest recorded estimate since 2007 (£41 billion)

Information about the investment choices of insurance companies, self-administered pension funds, investment trusts, unit trusts and property unit trusts. Reported in this release are quarterly net investment data arising from financial transactions (investments and disinvestments) made by these institutional groups. Also included are quarterly balance sheet data for short-term assets and liabilities, along with quarterly income and expenditure data for insurance companies and self-administered pension funds. All data are reported at current prices (effects of price changes included).

Every Q3 release contains annual balance sheet data for all the institutional groups; providing information on the market value of assets and liabilities. Annual income and expenditure data for insurance companies are also reported at this time.

A question often asked of the MQ5 release is ‘why does it only cover certain institutional groups?’ The answer is that these institutions control a substantial level of assets (over £3 trillion) and engage in considerable volumes of investment activity to fund their operations. An understanding of their investments and assets is important in order to monitor the stability of the financial sector and is a key contribution to the UK National Accounts.

Over the next few years, changes to surveys covering the financial sector will be necessary to ensure ONS becomes compliant with the revised European System of Accounts 2010 (ESA10). Once these changes have been made and ‘bedded in’, ONS will consider expanding the MQ5 release to cover other parts of the financial sector, such as securities dealers and businesses engaged in the provision of financial services.

ONS makes every effort to provide informative commentary on the data in this release. As part of the quality assurance process, individual businesses are contacted in an attempt to capture reasons for extreme period-on-period data movements. It can prove difficult to elicit detailed reasons from some businesses to help inform the commentary. Frequently, reasons given for data movements refer to a ‘change in investment strategy’ or a ‘fund manager’s decision’. Consequently, it is not possible for all data movements to be fully explained.

ONS is aware that a number of users make use of these data for modelling or forecasting purposes. In doing so, careful attention should be paid to the revisions policy (50.7 Kb Pdf) for this release. Comparing the first published estimates of total net investment with the equivalent estimates published three years later, the average quarterly revision (without regard to sign) is £6 billion.

The estimate of total net investment for Q2 2014 (last quarter) has been revised downwards by £4 billion (see background note 7 for further information).

A glossary is available to assist users with their understanding of the terms used in this release.

We are constantly aiming to improve this release and its associated commentary. We would welcome any feedback you might have, and would be particularly interested in knowing how you make use of these data to inform your work. Please contact us via email: Financial.Inquiries@ons.gov.uk or telephone Fred Norris on +44 (0)1633 456109.

The total assets of the businesses covered by this release (insurance companies, pension funds and trusts) were valued at £3,473 billion at the end of 2013, the latest period for which annual results are available. During 2013, these businesses acquired £1,666 billion and disposed of £1,638 billion longer-term financial instruments. Net investment is the difference between these substantial levels of acquisitions and disposals, as well as changes in holdings of short-term assets, and can therefore be volatile. Table 1 (at the end of this section) displays net investment data by asset type.

Total net investment is estimated at £23 billion in Q3 2014 (Figure 1).

Total net investment varies across the quarters of a calendar year and so an increase or decrease in investment from one quarter to the next is not necessarily an indicator of improved or worsening economic activity – these estimates are more likely to reflect varying investment strategies. In terms of context, the five-year quarterly average for this series is net investment of approximately £14 billion. The highest quarterly estimate of net investment since records began was £43 billion in Q3 2007. Net disinvestment last occurred in Q4 2008 (£20 billion).

For 2013 as a whole, net investment reported by the institutions covered by this release is estimated at £48 billion, compared with £56 billion and £24 billion for 2012 and 2011 respectively.

Short-term assets

Investment in short-term assets (those maturing within one year of their originating date) can be affected by the level of the net inflows of funds into the businesses concerned (premiums or contributions, for example) and by the relative attractiveness of other investments, both in terms of their potential returns and in their perceived risk.

In Q3 2014 there was net investment of £8 billion in short-term assets (Figure 2). This follows net disinvestment of £1 billion in Q2 2014 and net investment of £10 billion in Q1 2014. The five-year quarterly average for this series is net investment of £3 billion.

The annual net investment of £25 billion in short-term assets in 2013 was the largest since 2007. Continued strong investment in short-term assets during 2014 may reflect shifts in the balance of perceived risks among the surveyed institutional groups. Several global equity indices (including the FTSE) increased strongly during 2013, reflecting growing evidence of an economic recovery in the US and the UK. These positive developments were balanced against a reduction in the UK’s credit rating, first by Moody’s and then by Fitch, and by continuing sovereign debt concerns in the euro area with Cyprus receiving international financial support in March 2013. In light of these developments, a number of businesses reported that they were continuing to invest in short-term assets as they were “choosing to favour liquidity at this point in time.” Liquid assets are particularly attractive during periods of uncertainty, as they allow businesses to change their investment strategies with relative speed as events unfold.

The relatively strong investment in short-term assets in Q1 and Q3 of 2014, may indicate that businesses are remaining cautious and reluctant to commit to longer-term investment strategies, potentially reflecting continuing uncertainties in the economic and geopolitical environment.

Net disinvestment in short-term assets was reported in each of the years 2008, 2009 and 2010. This contrasts with the years 2011, 2012 and 2013 when net investment was reported. This longer-term comparison highlights how institutions, taking account of the prevailing economic climate, have potentially chosen to restructure their investment portfolios.

British Government Sterling Securities (Gilts)

Gilts are fixed income or index-linked bonds issued by the British government. On the primary gilt market, the purchaser of a gilt lends the government money in return for regular interest payments and the promise that the nominal value of the gilt will be repaid (redeemed) on a specified future date. These assets may then be bought and sold by investors in the secondary market. Gilts are very liquid assets which offer virtually risk-free returns.

In recent times, the market for gilts has been notably influenced by the Bank of England’s Quantitative Easing (QE) programme. Approximately £375 billion of gilts have been bought by the Bank under QE since the start of the programme in 2009.

The institutions covered by this release reported net investment in gilts in Q3 2014 of £8 billion (Figure 3), continuing a period of net investment that now extends over eight quarters.

Net investment in gilts is estimated to be £13 billion in 2013 following net disinvestment in gilts of £10 billion in 2012. So far in 2014, net investment in gilts is estimated to be £24 billion. This reversal in favour of investment may reflect a change of investment strategy among some market participants (particularly pension funds). It would seem to suggest that investors are switching back to, and staying in gilts, possibly in an attempt to avoid the relative volatility of equity markets.

Investment trends in gilts can best be explained by reviewing the role they play in financial markets. Gilts are attractive investments when interest rates are high and are likely to fall. If interest rates fall the price of the gilt rises and may therefore be sold at a profit. Conversely, if interest rates are low, as they are at present and have been since early 2009, the price of gilts is high and a loss might be anticipated if the stock is held to redemption. These characteristics, coupled with the completion of the Bank of England’s most recent asset purchase programme, helps to explain the longer-term profile of net investment in gilts.

Investment in gilts is discussed in more detail in the article - 'Trends in gilt investment from 2007-2013'.

UK corporate securities and overseas securities

These asset categories comprise ordinary shares, corporate bonds and preference shares. In addition, non-UK government securities are included as part of overseas securities.

The latest survey of these businesses’ balance sheets, for the end of 2013, showed that for only the fourth time, the value of overseas ordinary shares held by these institutions exceeded the value of UK ordinary shares. This is a recent trend, which was seen for the first time in 2010.

It would further appear that this trend has continued into 2014 (annual balance sheet survey data are required to confirm this assertion). This change in strategy, over the past four years, marks a key shift and would seem to indicate that the institutions covered by this release have sought higher returns relative to risk on their investments in overseas markets in preference to investing in UK securities.

This shift in behaviour is supported by external analysis. In May 2014, The Telegraph commented on research undertaken by Capita, suggesting that dividend payments for British shares will fall during 2014 and observed “with these clouds on the horizon some experts argue income investors should instead shop for divi-paying shares overseas. As well as there being much greater choice – there are seven times more income paying shares overseas than are listed on London's stock exchange."

UK corporate securities

In Q3 2014 there was net disinvestment (£2 billion) in UK corporate securities (Figure 4).This follows net disinvestment of £5 billion in Q2 2014 and continues a period of disinvestment that now extends over eight quarters. In 2014 so far, there has been net disinvestment of £12 billion in UK corporate securities. This is likely to reflect either the reallocation of funds towards short-term assets as part of a wider change in investment strategy, or the continued favouring of overseas securities.

Overseas securities

In Q3 2014 the institutions covered by this release reported net investment in overseas securities of £3 billion (Figure 5). This was the sixth consecutive quarter of net investment in overseas securities; however the level of net investment has fallen in four of the last five quarters. Long-term insurance companies reported net disinvestment of £3 billion, the fourth consecutive period of disinvestment in overseas securities by these companies.

Other assets

The category ‘other assets’ covers UK and overseas investment, and includes: British government securities denominated in foreign currency; local authority and public corporation securities; loans; mutual fund investments; fixed assets; investment in insurance managed funds, insurance policies and annuities; direct investment and other assets not elsewhere classified.

Investment in other assets has been positive since Q3 2003. The net investment of £6 billion in Q3 2014 (Figure 6), matches the five-year quarterly average for this series.

In Q3 2014 self-administered pension funds reported net investment in other assets of £1 billion. This is their lowest investment in other assets since Q2 2012 and compares with net investment of £3 billion and £4 billion in the second and first quarters of 2014 respectively.

Net investment data for each of the institutional groups covered by this release are displayed in Table 2.

Long-term insurance companies

These are companies which provide either protection in the form of life assurance or critical illness policies, or investment in the form of pension provision.

Long-term insurance companies showed net investment of £5 billion in the third quarter of 2014 (Figure 7). This was the first quarter of net investment for this institutional group since Q4 2012 and the largest quarterly net investment since Q3 2010.

The net disinvestment estimated to have occurred in 2011 (£4 billion) and 2013 (£17 billion) are the only instances of overall annual disinvestment recorded for this series, which dates back to 1963. In 2013, long-term insurance companies showed net disinvestment in UK corporate securities and gilts of £19 billion and £9 billion respectively. This disinvestment in longer-term assets contrasts with strong net investment in short-term assets (£14 billion), the largest since 2007. This may indicate a shifting investment strategy, towards the relative flexibility of liquid assets.

General insurance companies

These are companies which undertake other types of insurance such as motor, home and travel. This type of insurance is usually over a shorter period, most commonly 12 months.

General insurance companies showed net investment in Q3 2014 of £1 billion (Figure 8) which is slightly higher than the five-year quarterly average (£0.4 billion) for this series.

The largest single quarterly estimate over the past six years was in Q1 2010, when general insurance companies reported net disinvestment of £6 billion, which was driven by the disposal of short-term assets.

Self-administered pension funds

These are funds established by pension scheme trustees to facilitate and organise the investment of employees’ retirement funds. Self-administered pension funds showed net investment in Q3 2014 of £6 billion (Figure 9), their sixth consecutive quarter of net investment.

Self-administered pension funds continued to report strong net investment in gilts during 2014. Net investment of £6 billion in gilts in Q3 2014, followed net investment of £9 billion reported in both the first and second quarters of 2014, which were the largest quarterly net investments in gilts reported by this institutional group since the start of the time series in 1963. It may be that pension funds have been switching back to bonds in an attempt to beat the volatility of equity markets and receive guaranteed income streams to meet pension payments.

In terms of the future, pension changes announced in the March 2014 Budget may force a slowdown in the rate of bond purchases. Under the changes, individuals will no longer be required to purchase an annuity on retirement using the proceeds of defined contribution (DC) pension funds – a move that the Treasury has acknowledged could prompt demands for similar withdrawal rights from those in defined benefit (DB) schemes. This could mean that schemes may cut their long-term holdings of gilts and bonds.

Investment trusts

Investment trusts acquire financial assets with money subscribed by shareholders or borrowed in the form of loan capital. Investment trusts are not trusts in the legal sense, but are limited companies with two special characteristics: their assets consist of securities (mainly ordinary shares) and they are debarred by their articles of association from distributing capital gains as dividends. Shares of investment trusts are traded on the Stock Exchange and increasingly can be bought direct from the company.

The trend in the estimates for investment trusts continued broadly flat as it has been since the beginning of 2008 (Table 2).

Unit trusts and property unit trusts

Unit trusts include open-ended investment companies (OEICs) but do not cover other unitised collective investment schemes or those based offshore. They are set up under trust deeds, the trustee usually being a bank or insurance company. The funds in the trusts are managed not by the trustees, but by independent management companies. Units representing a share in the trusts’ assets can be bought from the managers or resold to them at any time.

Property unit trusts invest predominantly in freehold or leasehold commercial property yet may hold a small proportion of their investments in the securities of property companies.

Unit trusts and property unit trusts continued to invest in the third quarter of 2014, their 27th successive quarter of net investment (Figure 10). The level of net investment by unit trusts and property unit trusts in Q3 2014 (£14 billion) exceeds the five-year quarterly average for this institutional group (£12 billion).

The full-year estimate for 2013 of £51 billion follows the £53 billion recorded for unit trusts and property unit trusts in 2012, which was the highest level of net investment ever recorded for any institutional group.

In support of the recent high estimates for investments by unit trusts and property trusts are statistics released by the Investment Management Association. It reported that funds under management reached a record level in October 2014 of £819 billion, an increase of £48 billion since the end of 2013.

Rather than provide commentary on total income and expenditure for the institutional groups, it is considered more beneficial to users, based on their feedback, if commentary concentrates on the main components. For insurance companies, premiums and claims are the focus, while contributions (net of refunds) and payments are the focus for self-administered pension funds (Table 3). It should be noted that income and expenditure data are not currently collected for the trusts institutional group.

Long-term insurance companies

In the third quarter of 2014, the value of long-term insurance premiums was £29 billion (Figure 11) unchanged from the previous quarter and in line with the five-year quarterly average of £28 billion.

In 2006 and 2007 the value of premiums exceeded the value of claims. This trend has been reversed since and continued in each of the years 2008 to 2013. Annual estimates for 2013 as a whole show the value of claims to be around 40% greater than the value of premiums.

In Q3 2014, claims (£38 billion) were approximately 30% greater than the value of premiums (£29 billion).

General insurance companies

For general insurance, premiums (£9 billion) were around 55% greater than the value of claims (£6 billion) in Q3 2014 (Figure 12).

Self-administered pension funds

In Q3 2014 payments (£13 billion) exceeded net contributions (£9 billion) to self-administered pension funds. This difference between the levels of net contributions and payments was greater than at any time since Q1 2012.

It had previously been hypothesised that increasingly there seemed to be a pattern for pension funds to make one-off payments to reduce the deficits in their funds in Q1 and Q4 of a given year. This would lead to generally higher net contributions in these quarters compared with other quarters of the year (Figure 13). A possible explanation for this pattern was that companies, while compiling their end-of-year accounts, were better placed to determine by how much they were able to reduce the gap between the assets and liabilities of their pension funds by making one-off payments to reduce fund deficits.

These one-off payments are typically made in the form of employers special contributions. In Q1 2012 and Q1 2013, pension funds made special contributions of £8 billion and in Q1 2014, £5 billion. In the second and third quarters of 2014, pension funds made special contributions of £3 billion and £2 billion respectively, which is at a similar level to those made in the fourth quarter of 2012 and the second, third and fourth quarters of 2013. This may indicate that pension funds are now choosing to make larger special contributions in the first quarter, compared with the remaining quarters, of a given year.

The total assets of insurance companies, pension funds and trusts has increased each year since 2008 and at the end of 2013 was valued at £3,473 billion. This compares with £3,284 billion at the end of 2012 (Figure 14). This rise of 6% reflects both the revaluation of assets held through the year and the balance between the sales of some assets and the purchase of others (net investment or transactions).

The value of assets rose for all five asset types in 2013 compared with 2012 (Figure 15). Short-term assets and overseas securities both increased by 8%, other assets by 6% and the values of British government sterling securities (gilts) and UK corporate securities both increased by 3%.

Analysing patterns of investment and the final value of different asset types during 2013 highlights some of the defining features of financial markets during this period (Table 4). The institutions covered by this release disinvested £20 billion in UK corporate securities in 2013, but the value of their holdings increased by 3%. This may reflect the increase in UK corporate share prices through 2013 compared with the previous few years following the downturn.

In 2013, overseas securities were the largest asset type as a proportion of total holdings (29%). Holdings of UK corporate securities accounted for 29% of total holdings in 2008 but this decreased to 24% in 2013 (Figure 16). Over the same period, short-term assets increased from 10% to 14%.

In 2013, for the fourth consecutive year, the value of overseas ordinary shares held by these institutions exceeded the value of UK ordinary shares (Table 5). These are the only years in this series (which started in 1964), where this has occurred. As recently as 2009, the value of UK ordinary shares held exceeded the value of overseas ordinary shares. Since 2009, holdings in overseas ordinary shares have increased by 37%, while holdings of UK ordinary shares increased by only 6%. This may suggest that investors feel overseas share markets offer a more profitable return.

In 2013, mutual funds and other assets comprised 82% of the other assets total, which is in line with the 2012 estimate (Table 6). In 2013, UK loans made up 5% of the other assets total.

This release is compiled using data from quarterly and annual surveys. The annual surveys provide a fuller view of financial activity by these institutions than can be obtained from the quarterly surveys, which frequently have to be estimated by the businesses that respond. As a consequence there are revisions to the published data for the year, including net investment. In the years 2002 to 2007 (that is, before the market shock) those net investment revisions, irrespective of sign, averaged approximately £8 billion. In the years 2008 to 2013 (when markets have been more fluid), the annual revisions have averaged approximately £26 billion.

For 2013, total net investment (difference between acquisitions and disposals of longer-term financial instruments, as well as changes in holdings of short-term assets) by these institutions is estimated to be £48 billion. This estimate is approximately £36 billion less than before the data from the annual surveys were available. This revision is due to the result of new information being available from a considerable number of businesses, many of which (particularly in the long-term insurance and pensions sectors) now take the view that their net investment during the year was at a lower level than their first estimate. It is important to note that many businesses forecast their first estimates. This further helps to explain the sizeable discrepancy between the two estimates, especially if financial markets, which have been hard to predict over the past few years, do not perform in line with these businesses expectations.

The largest single revision to net investment estimates, by asset type, was for UK corporate securities, which were revised downwards by £11 billion followed by British government sterling securities (Gilts) which were revised downwards by £10 billion.

Both acquisitions and disposals of longer-term financial instruments are now seen as having been at lower levels than first estimated. The revision for acquisitions by all businesses in the institutional groups covered by this release was around 3% and disposals are now also seen as being approximately 3% lower than before. The difference between the two is now approximately £7 billion less than previously estimated.

A spreadsheet is available giving a revisions triangle (152.5 Kb Excel sheet) for net investment estimates from 1996 to date. Further information on revisions is given in background note 7 and Table R in the reference tables (1.69 Mb Excel sheet) shows revisions by asset type.