MQ5: Investment by insurance companies, pension funds and trusts: April to June 2018

• Net disinvestment of £3 billion was reported by insurance companies, pension funds and trusts in Quarter 2 (Apr to June) 2018; in terms of context, the five-year quarterly average for this series is net investment of £7 billion.

• In Quarter 2 2018, the overall net disinvestment of £3 billion by these institutions was caused mainly by net disinvestment in overseas ordinary shares (£15 billion) and UK ordinary shares (£10 billion). This was offset in part by net investment of £7 billion in other overseas corporate securities (mainly corporate bonds), £6 billion in other UK corporate securities and £4 billion in overseas government securities.

• In Quarter 2 2018, the net investment by unit trusts and property unit trusts in other overseas corporate securities (mainly corporate bonds) of £7 billion was the largest since the start of this series in 1986.

• The net investment of £5 billion by unit trusts and property unit trusts in other longer-term assets not elsewhere classified (mainly mutual funds) in Quarter 2 2018 was the largest since the start of this series in 1987.

• The Quarter 2 2018 estimate of net investment by self-administered pension funds in UK corporate bonds (£4 billion) was the largest since the start of this series in 2000.

• In 2017, the provisional annual estimate of net investment of £42 billion by insurance companies, pension funds and trusts in other assets (mainly mutual funds) was the largest since the start of this series in 1987; this was caused mainly by net investment by long-term insurance companies (£44 billion).

Over the next two years, changes to Office for National Statistics (ONS) surveys that cover the financial sector will be necessary as part of the Enhanced Financial Accounts (EFA) initiative whereby ONS, in partnership with the Bank of England, plans to improve the quality, coverage and granularity of UK financial statistics. This will be achieved by utilising new data from commercial, regulatory and administrative sources and reducing the burden and compliance on businesses that return our surveys.

This work entails wide-ranging redesign (and in some instances replacement) of the existing surveys that currently provide the data presented in this publication, making continued production of the MQ5 statistical bulletin in its current form unviable. Therefore the MQ5 will cease with the Quarter 4 (Oct to Dec) 2018 publication scheduled for March 2019. We apologise for any inconvenience this will cause to users of this publication but this work should ensure that we are able to disseminate improved statistics relating to the investment activities of the UK financial sector, within the next two to three years. If you have any concerns relating to this announcement please email Financial.Inquiries@ons.gov.uk

This publication considers the investment choices of insurance companies, self-administered pension funds, investment trusts, unit trusts and property unit trusts. Before viewing the MQ5 publication, it is recommended that readers familiarise themselves with the institutional groups covered within.

These institutions control £4 trillion of assets and engage in considerable volumes of investment activity to fund their operations. An understanding of their investments and assets is important to monitor the stability of the financial sector and is used in the compilation of the UK National Accounts.

The MQ5 release includes quarterly net investment data arising from financial transactions (investments) made by these institutions. Also included are quarterly balance sheet data for short-term assets and liabilities, plus 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).

We make 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.

Data for all quarters of 2017 remain provisional and subject to revision until the incorporation of the 2017 annual survey results in December 2018 (see Section 9 Revisions).

It is sometimes necessary to suppress figures for certain items to avoid disclosing investment activity by individual institutions. In these cases, the figures are usually combined with those for another item and this will be indicated in the tables by means of a footnote.

All estimates are reported on a current price basis (that is, they are not adjusted to remove the effects of inflation).

A Glossary is available to assist your understanding of the terms used in this release.

Provisional estimates for 2017 show that insurance companies, pension funds and trusts acquired £1,870 billion and disposed of £1,777 billion longer-term financial instruments. Net investment is the difference between acquisitions and disposals of longer-term assets, 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.

Quarter 2 (Apr to June) 2018 was the second consecutive quarter of net disinvestment (£3 billion) for this series (Figure 1). In terms of context, the five-year quarterly average for this series is net investment of £7 billion. Net investment was reported in other assets, short-term assets and UK government sterling securities.

For 2017, net investment reported by the institutions covered in this release is provisionally estimated at £88 billion, the highest since 2009 (£90 billion).

Net investment or net disinvestment 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 worsened economic activity. A better gauge of investor activity is the composition of investment between types of instruments over a number of quarters, which is more likely to reflect varying investment strategies.

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 risk.

In Quarter 2 2018, there was net investment of £1 billion in short-term assets (Figure 2). In terms of context, the five-year quarterly average for this series is net investment of £2 billion.

The provisional annual estimate of net investment of £29 billion in short-term assets in 2017 was the largest since 2007 (£41 billion). This may reflect a change in the outlook of the surveyed institutional groups with businesses choosing to favour liquidity at this time. Short-term assets are particularly attractive during periods of uncertainty, as they allow businesses to change their investment strategies as events unfold.

UK government sterling securities (gilts)

UK gilts (gilt-edged market securities) 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 that offer virtually risk-free returns.

The institutions covered by this release reported net investment in gilts in Quarter 2 2018 of £0.4 billion (Figure 3). In terms of context, the five-year quarterly average for this series is net investment of £4 billion.

Looking at the annual picture, the 2017 provisional estimate of net investment of £27 billion in gilts was the fifth consecutive year of net investment. This was preceded by net disinvestment in 2011 and 2012, which may suggest that some market participants have been switching back to gilts in recent years. This is possibly due to the relative attractiveness of gilts as low-risk compared with other asset types.

In recent times, the market for gilts has been notably influenced by the Bank of England's quantitative easing programme. On 4 August 2016, the Monetary Policy Committee voted to extend the programme of quantitative easing to £435 billion and to make up to £10 billion of corporate bond purchases over an 18-month period. The gilt portion of this extension ended in January 2017 and it reinvested funds from maturing assets in February and September of 2017. Generally, the additional demand for gilts from the Central Bank would likely result in net disinvestment by other institutions, notwithstanding issues of new gilts. These effects are not immediately apparent in the overall net investment data for this asset type.

UK gilts can be an attractive investment option because they are very secure, reflecting the fact that the British government has never failed to make an interest or principal payment when they are due. The demand for government bonds can increase in periods of economic uncertainty and geopolitical risk, with the popularity of this investment leading to an increase in the price of gilts and a fall in their yields.

The demand for gilts can also be driven by market expectations. For example, if the market anticipates that the central bank is going to announce expansionary monetary policy measures like quantitative easing, demand for these assets can grow, leading to an increase in the price of bonds and a fall in their yield. If you are interested in additional information about gilts that is not already covered in this release, please visit the UK Debt Management Office or Bank of England. In the event of future interest rate rises, then we may see a decrease in the price and a rise in the yield of gilts.

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 2017 provisional annual estimates suggest that overall, businesses associated with this release preferred to invest in fixed-income instruments (such as corporate bonds and government bonds) compared with ordinary shares. This was particularly evident in overseas securities and also in UK corporate securities and may indicate that these businesses saw fixed-income investments to be a relatively attractive and stable investment option, when compared with ordinary shares, during 2017. Stock markets were generally at a high level during 2017 (with the FTSE 100 reaching a high of 7,623). As share prices have risen, investors may have elected to diversify by increasing their bond exposure.

UK corporate securities

In Quarter 2 2018, there was net disinvestment of £4 billion in UK corporate securities (Figure 4). This was caused mainly by net disinvestment of £10 billion in UK ordinary shares, offset in part by net investment of £6 billion in other UK corporate securities (mainly corporate bonds).

In terms of context, the five-year quarterly average for UK corporate securities is net disinvestment of £6 billion.

The 2017 provisional annual estimate of net disinvestment of £28 billion in UK ordinary shares was the largest for this series since 2011 (£32 billion). This contrasts with net investment in other UK corporate securities (mainly corporate bonds) of £5 billion, the largest for this series since 2013 (£5 billion). There could be several drivers to these conflicting movements. For example, the investors sampled may have chosen to invest in corporate equity via a mutual fund, including passive investments into index trackers or Exchange Traded Funds. Alternatively, low productivity growth in the UK relative to other rich nations (as discussed in other ONS releases) might make other investments more attractive than UK equities.

Overseas securities

In Quarter 2 2018, there was net disinvestment of £3 billion (Figure 5) in overseas securities. This was the third consecutive quarter of net disinvestment for this series and was caused mainly by net disinvestment of £15 billion in overseas ordinary shares, the largest disinvestment for this series since Quarter 1 (Jan to Mar) 2000 (£23 billion). March 2000 is seen as the start of the “dot.com crash”, however, we are not aware of a specific factor influencing the relatively high levels of net disinvestment in these assets reported in the current quarter and also in Quarter 1 2018 (£13 billion).

The net disinvestment in overseas ordinary shares was offset in part by net investment of £7 billion in other overseas securities (mainly corporate bonds) and overseas government securities (£4 billion).

The 2017 provisional annual estimate of net investment in overseas securities (£13 billion) follows net disinvestment of £32 billion in 2016. This was caused mainly by net investment in overseas government securities of £16 billion, the highest level of net investment for this series since records began in 1986 and net investment in other overseas corporate securities (mainly corporate bonds) of £15 billion, the largest since 2012 (£21 billion). These have been offset in part by net disinvestment in overseas ordinary shares of £19 billion, which is the second-largest annual net disinvestment since the start of this series in 1986 (the largest being net disinvestment of £27 billion in 2016).

Other assets

The category “other assets” covers UK and overseas investment in:

• mutual fund investments
• insurance-managed funds
• UK government securities denominated in foreign currency
• local authority and public corporation securities
• loans
• fixed assets
• insurance policies and annuities
• direct investment
• other assets not elsewhere classified

In Quarter 2 2018, there was net investment of £3 billion (Figure 6) in other assets. In terms of context, the five-year quarterly average for this series is net investment of £6 billion.

The 2017 provisional annual estimate of net investment in other assets (£42 billion) was the largest since the start of this time series in 1987. This was caused mainly by net investment by long-term insurance companies in mutual funds. This may indicate that these businesses adopted a strategy of passive investment during 2017 (see Section 5, Long-term insurance companies).

Net investment data for each of the institutional groups covered by this release are displayed in Table 2 (at the end of this section).

Long-term insurance companies

These are companies that 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 Quarter 2 (Apr to June) 2018 (Figure 7). In terms of context, the five-year quarterly average for this series is net disinvestment of £2 billion.

The 2017 provisional annual estimate of net disinvestment by these businesses in overseas ordinary shares (£15 billion) was the largest since records began in 1963. The net disinvestment in UK ordinary shares (£19 billion) was the largest since 2012 (£24 billion). This net disinvestment in shares contrasts with the 2017 provisional estimate of net investment in mutual funds (£40 billion), which was the largest since the start of this time series in 2000. This may indicate that these businesses adopted a strategy of passive investment during this period. Passive investment is a strategy whereby asset holders invest in funds that hold a basket of assets to represent the asset group. This ensures that returns to the investor are the same as the returns of that asset group, but costs are reduced as analysis of each constituent of the group is not required.

General insurance companies

These are companies that 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 Quarter 2 2018 of £0.1 billion (Figure 8) broadly in line with the five-year quarterly average for this series.

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 reported net investment in Quarter 2 2018 of £5 billion (Figure 9) in line with the five-year quarterly average for this series.

The net investment by self-administered pension funds in UK corporate bonds (£4 billion) was the largest since the start of this series in Quarter 1 (Jan to Mar) 2000. In contrast, the net disinvestment by these funds in overseas ordinary shares (£9 billion) was the largest since Quarter 1 2000 (£15 billion).

In 2017, the provisional annual estimate of net investment by self-administered pension funds (£38 billion) was the largest since the start of this series in 1964. This was caused mainly by net investment in gilts of £31 billion.

By contrast, the 2017 provisional estimate of net disinvestment (£20 billion) by these businesses in overseas ordinary shares was the largest since the start of this series in 1963, following net disinvestment of £12 billion in 2016. This, along with the increased move towards gilts, may indicate that these businesses were pursuing a relatively liquid investment portfolio in recent years.

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 and they are debarred by their articles of association from distributing capital gains as dividends. Shares of investment trusts are traded on the London Stock Exchange and increasingly can be bought direct from the company.

In Quarter 2 2018, investment trusts reported net investment of £1 billion.

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.

In Quarter 2 2018, unit trusts and property unit trusts reported net investment of £9 billion (Figure 10). The five-year quarterly average for this series is net investment of £10 billion.

In Quarter 2 2018, the net investment by unit trusts and property unit trusts in other overseas corporate securities (mainly corporate bonds) of £7 billion was the largest since the start of this series in 1986.

The net investment by unit trusts and property unit trusts in other assets (mainly mutual funds) of £5 billion in Quarter 2 2018 was the largest since the start of this series in 1987.

In 2017, the provisional annual estimate of net investment by unit trusts and property unit trusts (£81 billion) was the largest since the start of this series in 1984. This was caused mainly by net investment in overseas securities and short-term assets. The net investment in overseas securities (£40 billion) was the largest since the start of this series in 1986. This consisted of net investment in overseas ordinary shares (£18 billion), overseas government, provincial and municipal securities (£12 billion) and other overseas corporate securities (£10 billion).

In 2017, the provisional annual estimate of net investment in short-term assets (£18 billion) by unit trusts and property unit trusts was the largest since the start of this series in 1980.

Rather than provide analysis on total income and expenditure for the institutional groups, it is considered more beneficial to users, based on their feedback, if commentary is concentrated on particular components. For insurance companies, the focus is on premiums and claims, while contributions (net of refunds) and payments are the focus for self-administered pension funds (see Table 3, at the end of this section).

Long-term insurance companies

In Quarter 2 (Apr to June) 2018, the value of claims was £40 billion, broadly in line with the five-year average for this series. The value of long-term insurance premiums in Quarter 2 2018 was £37 billion (Figure 11). The five-year quarterly average for this series is £34 billion.

The value of claims has exceeded the value of premiums in each of the years since 2008, reversing the trend of premiums exceeding the value of claims, evident between 2003 (when records for these series began) and 2007.

General insurance companies

In Quarter 2 2018, the value of premiums was £9 billion, in keeping with the five-year quarterly average for this series.

In Quarter 2 2018, the value of claims was £6 billion, in line with the five-year quarterly average for this series (Figure 12).

Self-administered pension funds

Contributions to self-administered pension funds (net of refunds) in Quarter 2 2018 were £11 billion, broadly in line with the five-year quarterly average for this series.

Over 2017, the special contributions made to pension funds by companies remained at an elevated level compared with equivalent quarters in previous years. This may have been a reaction to the effects of quantitative easing in 2016, which pushed down long-term interest rates, negatively affecting pension liabilities levels. These elevated levels of special contributions were also apparent from 2009 to 2013 and the Bank of England engaged in quantitative easing throughout 2010 to 2012.

In recent years, we have tended to see a higher level of special contributions at Quarter 1, which may suggest that companies are more informed about the amount they can spend on pension liabilities prior to the tax year ending. This would lead to generally higher net contributions in this quarter compared with other quarters of the year (Figure 13). However, special contributions in Quarter 1 2018 do not follow this pattern, which may suggest that some companies are reviewing this strategy.

Payments (comprising pensions payable gross of Income Tax, lump sums payable on retirement and death benefits) by self-administered pension funds in Quarter 2 2018 were £14 billion, in line with the five-year quarterly average for this series.

The most recently available annual balance sheet data, providing information on the market value of asset holdings, is for 2016 (Figure 14). Market value is the quoted price at which assets are bought or sold, at a given time. Increase or decrease in the total holdings of assets 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 total assets held by insurance companies, pension funds and trusts (at market values) has increased each year since 2008 and at the end of 2016 was valued at £4,188 billion.

Figure 14: Values of holdings at market values by asset type

UK, 2016

Source: Office for National Statistics

Download this image Figure 14: Values of holdings at market values by asset type

.png (25.8 kB) .xls (31.7 kB)

The Quarter 3 (July to Sept) 2018 release, due to be published in December 2018, will contain annual 2017 balance sheet information.

There are several ways to view the data underlying this release.

The MQ5: Investment by insurance companies, pension funds and trusts dataset shows data from both the quarterly and annual series:

• Tables A to D combine information from the different institutions
• Section 1 combines information from the long-term and general insurance surveys
• Section 2 covers information from the surveys of long-term insurance companies
• Section 3 covers information from the surveys of general insurance companies
• Section 4 covers information from the surveys of self-administered pension funds
• Section 5 covers information from the surveys of investment trusts
• Section 6 covers information from the surveys of unit trusts and property unit trusts

If you are interested in a particular series or groups of series covering a longer period of time (pre-2010), then you can access the Investment by Insurance Companies, Pension Funds and Trusts time series.

There is scope to expand coverage of these datasets and/or add further datasets. We are keen to hear your views – please email us at financial.inquiries@ons.gov.uk.

A revisions policy is available to assist users with their understanding of the cycle and frequency of data revisions. You are strongly advised to read this policy before using these data for research or policy-related purposes.

Data for 2017 remain provisional and subject to revision, until the incorporation of the 2017 annual survey results in December 2018. Data for the quarters of 2017 have been revised, due partly to late questionnaires being received and partly as a result of disaggregate data revisions. For Quarter 1 (Jan to Mar) 2018, the estimate of net investment has been revised downwards from net investment of £1 billion to net disinvestment of £7 billion.

Revisions to data provide one indication of the reliability of main indicators. A dataset is available giving a revisions triangle of estimates of net investment from 1996 to date.

The figures in this release are based on a system of quarterly and annual surveys collecting data on income and expenditure, transactions in financial assets and the balance sheet in separate surveys. Response rates in Quarter 1 (Jan to Mar) 2018 are broadly in line with previous quarters’ response rates.

The Investment by insurance companies, pension funds and trusts (MQ5) Quality and Methodology Information report contains important information on:

• the strengths and limitations of the data and how it compares with related data
• uses and users of the data
• how the output was created
• the quality of the output including the accuracy of the data