MQ5: Investment by Insurance Companies, Pension Funds and Trusts: Q4 2014

• Net disinvestment of £11 billion was reported by insurance companies, pension funds and trusts in the fourth quarter of 2014. This was the first quarter of net disinvestment for this series since the fourth quarter of 2008 (£20 billion)
• In Q4 2014, net investment by unit trusts and property unit trusts (£2 billion) was the smallest by this institutional group since the fourth quarter of 2007 (net disinvestment of £1 billion)
• The 2014 provisional annual estimate of net investment by insurance companies, pension funds and trusts was £39 billion, compared with £48 billion in 2013
• The 2014 provisional annual estimate of net investment by long-term insurance companies in mutual funds (£30 billion) was the largest level of net investment since the start of this series in 2000

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).

Data for all quarters of 2014 remain provisional and subject to revision until the incorporation of the 2014 annual survey results in December 2015.

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 compilation of 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 £7 billion.

The estimate of total net investment for Q3 2014 (last quarter) has been revised downwards by £7 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.

Over the next three years, changes to ONS surveys that cover the financial sector will be necessary to ensure compliance with the new European System of Accounts 2010 (ESA10). ESA10 introduces significant changes in the measurement and classification of financial instruments and the structure of the financial sector. This will result in wide ranging changes to the surveys used to collect the data presented in MQ5.

To ensure these statistics continue to meet user needs as far as possible, ONS would like to hear from users about how they use MQ5 data and their preferences for the future publication of these statistics. ONS would also like to engage with users on the ongoing development of these statistics.

To enable ONS to fully understand user needs, please take the time to participate in this consultation.

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 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 £12 billion. The highest quarterly estimate of net investment since records began (in 1987) was £43 billion in Q3 2007.

Data for all quarters of 2014 remain provisional and subject to revision until the incorporation of the 2014 annual survey results in December 2015. In Q4 2014 there was net disinvestment of £11 billion (Figure 1). Net disinvestment was reported across short-term assets, UK government sterling securities, UK corporate securities and overseas securities. This was partly offset by net investment in other assets. Total net disinvestment last occurred in Q4 2008 (£20 billion).

For 2014 as a whole, net investment reported by the institutions covered by this release is estimated at £39 billion, compared with £48 billion and £56 billion in 2013 and 2012 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 Q4 2014 there was net disinvestment of £7 billion in short-term assets, following net investment of £6 billion last quarter (Figure 2). The five-year quarterly average for this series is net investment of £3 billion. The provisional estimate of net investment in short-term assets for 2014 as a whole (£8 billion) is the lowest annual estimate since net disinvestment of £8 billion in 2010.

The net disinvestment in short-term assets in Q4 2014 was the largest since Q2 2010 (£11 billion). While this may be a single quarter occurrence, further data would be required to confirm this potential trend.

UK government sterling securities (Gilts)

Gilts are fixed income or index-linked bonds issued by the UK 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 disinvestment in gilts in Q4 2014 of £3 billion (Figure 3). This was the first quarter of disinvestment since Q3 2012. The five-year quarterly average for this series is net investment of £2 billion.

Net investment in gilts is estimated to be £18 billion in 2014, following net investment of £13 billion in 2013. This was preceded by net disinvestment in 2011 and 2012. This reversal in favour of investment may reflect a change of investment strategy among some market participants (particularly pension funds). Looking at this annual picture, it would seem to suggest that investors are switching back to 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 of 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.”

In Q4 2014 there was net disinvestment in both UK corporate securities and overseas securities, for the first time since the first quarter of 2013.

UK corporate securities

In Q4 2014 there was net disinvestment (£9 billion) in UK corporate securities (Figure 4). This follows net disinvestment of £2 billion in Q3 2014 and continues a period of disinvestment that now extends over nine quarters. The 2014 provisional annual estimate was net disinvestment of £20 billion in UK corporate securities, the same as in 2013.

Overseas securities

In Q4 2014 the institutions covered by this release reported net disinvestment in overseas securities of £2 billion (Figure 5). This was driven by net disinvestment in overseas shares of £4 billion and was the first quarter of net disinvestment in overseas securities since Q1 2013.

Long-term insurance companies reported net disinvestment of £1 billion, the fifth consecutive period of disinvestment in overseas securities by these companies. This continuing trend is not shown in estimates provided by the other institutional groups.

Other Assets

The category ‘other assets’ covers UK and overseas investment, and includes: UK 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 £9 billion in Q4 2014 (Figure 6) is higher than the five-year quarterly average for this series of £6 billion and is the largest net investment since the third quarter of 2011.

In Q4 2014 self-administered pension funds reported net investment in other assets of £6 billion. This was the largest net investment in other assets by this institutional group since Q4 2012 and was driven by net investment of £5 billion in mutual funds.

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 disinvestment of £3 billion in the fourth quarter of 2014 (Figure 7). This was the seventh quarter of net disinvestment by these companies since Q4 2012.

The provisional estimate of net disinvestment for 2014 as a whole (£7 billion) follows net disinvestment in 2013 (£17 billion) and 2011 (£4 billion). These are the only instances of annual disinvestment recorded for this series, which dates back to 1963.

In 2014, long-term insurance companies showed net disinvestment in UK corporate securities, gilts and overseas securities of £19 billion, £13 billion and £11 billion respectively. This contrasts with the provisional 2014 estimate of net investment by long-term insurance companies in mutual funds (£30 billion), which was the largest level of net investment since the start of the series in 2000. It may be that these businesses are investing more in mutual funds in an effort to diversify and manage risk.

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 disinvestment in Q4 2014 of £1 billion (Figure 8), the first quarter of net disinvestment since Q1 2013. The five-year quarterly average for this series is net investment of £0.2 billion.

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 disinvestment in Q4 2014 of £5 billion (Figure 9). This was the first quarter of net disinvestment since Q1 2013.

Overall, self-administered pension funds reported strong net investment in gilts during 2014. Net investment of £9 billion reported in both the first and second quarters of 2014, were the largest quarterly net investments in gilts reported by this institutional group since the start of the time series in 1963. However, in the second half of the year the level of net investment in gilts fell to £3 billion and £0.1 billion in Q3 2014 and Q4 2014 respectively.

It is possible that pension changes announced in the March 2014 Budget may prompt 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 net investment 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 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 fourth quarter of 2014, their 28th successive quarter of net investment (Figure 10). However the level of net investment by unit trusts and property unit trusts in Q4 2014 (£2 billion) is the smallest since Q4 2007 and much lower than the five-year quarterly average for this institutional group (£11 billion).

The provisional full-year estimate of net investment by unit trusts and property unit trusts for 2014 (£46 billion) follows net investment of £53 billion in 2012 and £51 billion in 2013. These annual estimates for 2012 and 2013 are the highest annual levels of net investment ever recorded for any institutional group.

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 fourth quarter of 2014, the value of long-term insurance premiums was £29 billion (Figure 11), an increase from £27 billion in 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. Provisional estimates for 2014 show the value of claims to be around 35% greater than the value of premiums.

In Q4 2014, long-term insurance claims (£44 billion) were at their highest level since the fourth quarter of 2009. The difference between the level of claims and premiums (£15 billion) was greater than at any time since the fourth quarter of 2009.

General insurance companies

For general insurance, premiums (£9 billion) were around 56% greater than the value of claims (£6 billion) in Q4 2014 (Figure 12).

Self-administered pension funds

In Q4 2014 payments (£13 billion) exceeded net contributions (£10 billion) to self-administered pension funds.

In recent years there seems to be a pattern for pension funds to make one-off payments to reduce the deficits in their funds in Q1 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 is that companies, while compiling their end-of-year accounts, are better placed to determine by how much they are 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, third and fourth quarters of 2012, 2013 and 2014, the largest employers special contributions made by pensions funds was £4 billion.