MQ5: Investment by Insurance Companies, Pension Funds and Trusts: Quarter 4 (Oct to Dec) 2016

• Net disinvestment of £18 billion was reported by insurance companies, pension funds and trusts in the fourth quarter (Oct to Dec) of 2016; this was the second consecutive quarter of net disinvestment and only the sixth since the start of this series in 1987.
• In 2016, the provisional estimate of net disinvestment by insurance companies, pension funds and trusts (£40 billion) was the first since the start of this series in 1987.
• In Quarter 4 2016, the net disinvestment by pension funds of £9 billion was the largest for this series since Quarter 4 2008 (£18 billion).
• In Quarter 4 2016, the net disinvestment of £4 billion by pension funds in overseas mutual fund investments was the largest since the start of the series in 1996.
• The net disinvestment in overseas securities by long-term insurance companies in Quarter 4 2016 (£7 billion), was the largest since the first quarter (Jan to Mar) of 2013 (£9 billion).
• The 2016 provisional annual estimate of net disinvestment in overseas securities (£45 billion) was the largest since the start of this series in 1986; this was mainly caused by net disinvestment in overseas ordinary shares (£36 billion).
• In 2016, the provisional estimate of net investment by pension funds in gilts (£31 billion) was the largest since the start of this series in 1963.

This release contains information about the investment choices of insurance companies, self-administered pension funds, investment trusts, unit trusts and property unit trusts. It includes 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, 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).

Data for Quarter 1 (Jan to Mar) 2016 onwards remain provisional and subject to revision until the incorporation of the 2016 annual survey results in December 2017.

A question often asked of the MQ5 release is “why does it only cover certain institutional groups?” The answer is that 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 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 you make use of these data for modelling or forecasting purposes. In doing so, careful attention should be paid to the MQ5 revisions policy and history (see revisions triangle). 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 £9 billion. The estimate of total net investment for Quarter 3 (July to Sept) 2016 has been revised upwards by £4 billion (see Background note 6 for further information).

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

We aim to constantly improve this release and its associated commentary. We welcome any feedback you might have and are particularly interested to know 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 £3,696 billion at the end of 2015, the latest period for which annual results are available. Annual balance sheet data for 2016 will be incorporated into these estimates in December 2017.

During 2015, these businesses acquired £1,586 billion and disposed of £1,545 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.

In Quarter 4 (Oct to Dec) 2016, there was net disinvestment of £18 billion (Figure 1). This was the third occurrence of total net disinvestment during the year-to-date and only the sixth since the start of this series in 1987. In terms of context, the 5-year quarterly average for this series is net investment of £5 billion. In Quarter 4 2016, net disinvestment was reported in overseas securities, other assets, UK corporate securities and short-term assets. This was partly offset by net investment in UK government sterling securities.

Net disinvestment at a total level is unusual and may be influenced by changes in investor confidence in the economic environment. 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. 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.

In Quarter 4 2016, the overall net disinvestment was caused mainly by disinvestment in overseas securities (£12 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 2016, there was net disinvestment of £5 billion in short-term assets (Figure 2). The 5-year quarterly average for this series is net investment of £3 billion. The net disinvestment was caused mainly by disinvestment in short-term assets by pension funds (£4 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. In 2016, the provisional estimate was net investment of £8 billion. 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)

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 which offer virtually risk-free returns.

The institutions covered by this release reported net investment in gilts in Quarter 4 2016 of £8 billion (Figure 3). The 5-year quarterly average for this series is net investment of £2 billion.

Looking at the annual picture, the 2016 (provisional) estimate of net investment in gilts was £18 billion and this was the fourth consecutive year of annual net investment in gilts. This was preceded by net disinvestment in 2011 and 2012, which 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.

In recent times, the market for gilts has been notably influenced by the Bank of England’s Quantitative Easing (QE) 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.

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. These characteristics may help to explain the longer-term profile of net investment in gilts.

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.

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 2016, there was net disinvestment of £4 billion in UK corporate securities (Figure 4). This is in keeping with the general pattern of disinvestment since the beginning of 2010. In terms of context, the 5-year quarterly average for this series is net disinvestment of £5 billion.

The net disinvestment in UK ordinary shares (£5 billion) was the fourth consecutive quarter of disinvestment for this series. This was mainly due to net disinvestment by long-term insurance companies (£3 billion) and pension funds (£2 billion).

The net investment of £1 billion in other UK corporate securities (mainly corporate bonds) was the second consecutive quarter of net investment for this series, following 8 consecutive quarters of net disinvestment. This may suggest that this asset type is a relatively attractive investment at this time, in terms of potential returns and perceived risk.

Overseas securities

In Quarter 4 2016, the institutions covered by this release reported net disinvestment of £12 billion (Figure 5). This was caused mainly by net disinvestment in overseas ordinary shares (£9 billion) and other overseas corporate securities (£5 billion).

The provisional estimate of net disinvestment in overseas securities, across the 4 quarters of 2016, follows 4 consecutive quarters of net investment in this asset type. This would seem to indicate a change in investment strategy and reduced appetite for these assets, which may be due to fluctuation in the value of sterling and financial uncertainty.

The 2016 provisional annual estimate of net disinvestment in overseas securities (£45 billion) was the largest since the start of this series in 1986. This was mainly due to net disinvestment in overseas ordinary shares (£36 billion), the largest since the start of this series (1986) and net disinvestment in other overseas corporate securities (£7 billion), the first since the start of this series in 1986.

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 2016, there was net disinvestment of £5 billion in other assets (Figure 6). This was the third consecutive quarter of disinvestment for this series and only the fifth since the start of the series in 1987. This was mainly due to net disinvestment of £4 billion by pension funds in overseas mutual fund investments.

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 £7 billion in Quarter 4 (Oct to Dec) 2016 (Figure 7). The 5-year quarterly average for this series is net disinvestment of £3 billion.

The net disinvestment in overseas securities by long-term insurance companies in Quarter 4 2016 (£7 billion), was the largest since the first quarter (Jan to Mar) of 2013 (£9 billion).

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 4 2016 of £1 billion (Figure 8).

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 disinvestment in Quarter 4 2016 of £9 billion (Figure 9). This was the largest net disinvestment for this series since Quarter 4 2008 (£18 billion). The provisional estimate of net investment for 2016 as a whole (£16 billion) was the largest since 2013 (£19 billion).

In Quarter 4 2016, the net disinvestment of £4 billion by pension funds in overseas mutual fund investments was the largest since the start of the series in 1996.

The net disinvestment in overseas securities by self-administered pension funds in Quarter 4 2016 (£6 billion), was the largest since the first quarter (Jan to Mar) of 2013 (£6 billion).

In 2016, the provisional estimate of net investment by self-administered pension funds in gilts (£31 billion) follows net investment of £20 billion in 2015. These are the highest levels of annual net investment in gilts by pension funds, since the time series began in 1963. By contrast, in 2016 the provisional estimates of net disinvestment by pension funds in overseas securities and UK corporate securities were £16 billion and £6 billion respectively. The move away from higher-yielding investments towards government gilts may be indicative of the extent to which these businesses are pursuing a relatively safe investment policy.

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 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 Quarter 4 2016, investment trusts reported net disinvestment 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.

In Quarter 4 2016, unit trusts and property unit trusts reported net investment of £3 billion (Figure 10). The 5-year quarterly average for this series is net investment of £9 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, 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 4 (Oct to Dec) 2016, the value of claims was £40 billion, broadly in line with the 5-year quarterly average for this series (£39 billion). In the same period the value of premiums was £33 billion. The 5-year quarterly average for this series is £30 billion.

The value of claims exceeded the value of premiums in each of the years 2008 to 2015, 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 4 (Oct to Dec) 2016, the value of premiums was £9 billion in keeping with the 5-year quarterly average for this series. The value of claims was £6 billion, which is also in keeping with the 5-year quarterly average.

Self-administered pension funds

Contributions to self-administered pension funds (net of refunds) in Quarter 4 2016 were £10 billion, 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 “special contributions” in Quarter 1 (Jan to Mar) 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 additional input required to address pension fund deficit. Estimates of these one-off employers' special contributions were relatively high in the first quarter of each year since 2012. In Quarter 1 2016, pension funds made special contributions of £9 billion.

Payments (comprising pensions payable gross of Income Tax, lump sums payable on retirement and death benefits) by self-administered pension funds in Quarter 4 2016 were £13 billion, in line with the 5-year quarterly average for this series.

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 dataset.

Our Data Explorer and Open API explorable datasets are additional tools which enable you to access, use and customise data more effectively. The Data Explorer makes it easier for you 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 are keen to hear your views – please email us: financial.inquiries@ons.gov.uk.

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

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