MQ5: Investment by insurance companies, pension funds and trusts: Quarter 4 (October to December) 2015

Total net investment by insurance companies, pension funds and trusts is estimated at £10 billion in the fourth quarter (October to December) of 2015.

The 2015 provisional annual estimate of net investment by insurance companies, pension funds and trusts was £59 billion, compared with £13 billion in 2014.

The 2015 provisional annual estimate of net investment by self-administered pension funds (£39 billion) was the largest on record, with the previous highest being £33 billion in 2009. The 2015 figure was driven by investment of £32 billion in UK government sterling securities (gilts).

Quarter 4 2015 saw the largest net disinvestment (of £5 billion) in "other" UK corporate securities (which includes corporate bonds and preference shares) since the series began (1986).

Information about the investment choices of insurance companies, self-administered pension funds, investment trusts, unit trusts and property unit trusts. This release contains quarterly net investment data arising from financial transactions (investments) 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).

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 used in the compilation of the UK National Accounts.

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.

We are 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 for this release. Comparing the first published estimates of total net investment with the equivalent estimates published 3 years later, the average quarterly revision (without regard to sign) is £7.8 billion. The estimate of total net investment for Quarter 3 (July to September) 2015 (last quarter) has been revised downwards by £2 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.

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 particular series or groups of series covering a longer period of time (pre-2010), then you can access the time series dataset.

The ONS Data Explorer and Open API explorable datasets are additional tools which enable users to access, use and customise data more effectively. The Data Explorer makes it easier for users to find, view and download data. The Open API allows data to be used directly by other applications. The data have been categorised into 4 datasets:

• MQ5QNI: Net investment by insurance companies, pension funds and trusts
• MQ5AAL: Assets and liabilities of insurance companies, pension funds and trusts
• MQ5QAD: Acquisitions and disposals of insurance companies, pension funds and trusts
• MQ5QH: Holdings of insurance companies, pension funds and trusts

There is scope to expand coverage of these datasets and/or add further datasets. We would be very keen on hearing your views – please email us: financial.inquiries@ons.gov.uk.

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 £3,655 billion at the end of 2014, the latest period for which annual results are available. During 2014, these businesses acquired £1,613 billion and disposed of £1,581 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.

In Quarter 4 (October to December) 2015 there was net investment of £10 billion (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 5-year quarterly average for this series is net investment of £10 billion. The highest quarterly estimate of net investment since records began (in 1987) was £43 billion in Quarter 3 2007.

For 2015 as a whole, net investment reported by the institutions covered in this release is provisionally estimated at £59 billion, the highest since 2010 (£68 billion). The 5-year annual average for this series is net investment of £40 billion.

Short-term assets

Investment in short-term assets (those maturing within 1 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 Quarter 4 2015 there was net investment of £9 billion in short-term assets (Figure 2). The 5-year quarterly average for this series is net investment of £3 billion.

There was net disinvestment in short-term assets in each of the years 2008, 2009 and 2010. This contrasts with all subsequent years, where a net investment has been reported. This longer-term comparison highlights how institutions, taking account of the prevailing economic climate, have chosen to restructure their investment portfolios.

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.

The institutions covered by this release reported net investment in gilts in Quarter 4 2015 of £3 billion (Figure 3). The 5-year quarterly average for this series is net investment of around £1 billion.

Net investment in gilts is provisionally estimated to have been £14 billion in 2015, following net investment of £10 billion in 2014 and £13 billion in 2013. This was preceded by net disinvestment in 2011 and 2012. Looking at this annual picture, it would seem to suggest that some market participants (particularly pension funds) have been switching back to gilts in recent years, possibly in an attempt to avoid the relative volatility of equity markets. On 6 July 2015 the Financial Times, reflecting on recent investment trends, reported “increased appetite for gilts reflecting concerns over Greece and improving government finances”.

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.

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 it may therefore be sold at a profit. Conversely, if interest rates are low (as they 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 QE programme, helps to explain the longer-term profile of net investment in 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.

UK corporate securities

In Quarter 4 2015, there was net disinvestment of around £4 billion in UK corporate securities (Figure 4) in keeping with the general pattern of disinvestment since the beginning of 2010 and broadly consistent with the 5-year quarterly average for this series (net disinvestment of £5 billion).

In Quarter 4 2015, there was net disinvestment of £5 billion in "other" UK corporate securities (which includes corporate bonds and preference shares). This was the largest disinvestment since the series began (1986) although similar to the level of net disinvestment in Quarter 4 2014 (also £5 billion). Quarter 4 2015 was the sixth consecutive quarter of net disinvestment.

Overseas securities

In contrast to the general trend of net disinvestment in UK corporate securities, Figure 5 shows that in recent quarters, there has been net investment in overseas securities. This may indicate that businesses have more confidence in their ability to make money from overseas securities than they do from UK corporate securities.

In Quarter 4 2015, the institutions covered by this release reported net investment in overseas securities of £4 billion. For context, the 5-year quarterly average for overseas securities is net investment of £6 billion.

In March 2015, the Daily Telegraph commented that: “Investors of all sizes, from individuals overseeing their Isas to huge institutional pension funds, are increasingly global in their outlook.” and that “this trend is gaining momentum so rapidly that most stockbrokers are refining their overseas shares service, cutting charges and offering new features such as the ability to hold different currencies or trade across many niche markets”.

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 4 2015, there was net disinvestment of around £1 billion in other assets (Figure 6). This is the first time there has been net disinvestment in other assets since Quarter 2 (April to June) 2003. In terms of context, the 5-year quarterly average for other assets is net investment of £5 billion.

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 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 Quarter 4 (October to December) 2015 (Figure 7), broadly in line with the 5-year quarterly average for this series (net disinvestment of £2 billion).

The Quarter 4 2015 disinvestment in UK gilts by long-term insurance companies (of £2.9 billion) continues the trend of disinvesting in these securities which dates back to Quarter 3 (July to September) 2013.

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 Quarter 4 2015 of £3 billion (Figure 8), the largest net investment by these businesses since Quarter 4 2009. The 5-year quarterly average for this series is net disinvestment of £0.1 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 reported net investment in Quarter 4 2015 of £9 billion (Figure 9). The 5-year quarterly average for this series is net investment of £5 billion.

In Quarter 4 2015, self-administered pension funds reported net investment in short-term assets of £4 billion. This was the largest net investment in this asset type by these businesses since Quarter 1 (January to March) 2011.

The 2015 provisional annual estimate of net investment by self-administered pension funds (£39 billion) was the largest on record, with the previous highest being £33 billion in 2009. This was driven by net investment in gilts, provisionally estimated to be £32 billion in 2015, following net investment of £14 billion in 2014 and £17 billion in 2013. These are the highest levels of net investment in gilts by these businesses since the time series began in 1963.

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 2 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.

In the fourth quarter of 2015, investment trusts reported net disinvestment of £0.4 billion, in line with the 5-year quarterly average for this series (net investment of £0.1 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.

Unit trusts and property unit trusts have reported net investment in each quarter since Quarter 4 2007. In Quarter 4 2015, these businesses reported net investment of £9 billion (Figure 10). The 5-year quarterly average for this institutional group is net investment of £11 billion.

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, premiums and claims are the focus, while contributions (net of refunds) and payments are the focus for self-administered pension funds (see Table 3, at the end of this section). 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 2015 (October to December), the value of long-term insurance premiums was £37 billion (Figure 11). For context, the 5-year quarterly average for this time series was £28 billion.

The value of premiums exceeded the value of claims between 2003 (when records for these series began) and 2007. However, this trend reversed and has continued in each of the years 2008 to 2014. Provisional estimates for 2015 show the value of claims to be around 30% greater than the value of premiums.

In Quarter 4 2015, claims (£39 billion) were approximately 5% greater than the value of premiums (£37 billion).

General insurance companies

For general insurance, premiums (£9 billion) were around 54% greater than the value of claims (£6 billion) in Quarter 4 2015 (Figure 12).

Self-administered pension funds

Contributions to self-administered pension funds (net of refunds) in Quarter 4 2015 (£10 billion) were broadly in line with the 5-year quarterly average for this series (£11 billion).

In recent years there seems to be a pattern for pension funds to make one-off payments in Quarter 1 (January to March) of a given year, in order to reduce the deficits in their funds. This would lead to generally higher net contributions in this quarter compared with other quarters of the year (Figure 13). A possible explanation for this pattern is that companies with defined benefit schemes, while compiling their end of year accounts, are better placed to determine the level of contributions needed to fund any deficit. Deficits can be addressed in the form of employers’ special contributions. Estimates of these one-off payments were relatively high in the first quarters of 2012 (£8 billion), 2013 (£8 billion), 2014 (£5 billion) and 2015 (provisionally estimated at £4 billion).