MQ5: Investment by Insurance Companies, Pension Funds and Trusts: Quarter 3 (July to Sept) 2016

This is the first full quarterly estimate of investment by insurance companies, pension funds and trusts following the EU referendum, but only a very limited number of our survey respondents mentioned this as a factor in their returns.

Net disinvestment of £15 billion was reported by insurance companies, pension funds and trusts in the third quarter (July to Sept) of 2016. This was the second occurrence of total net disinvestment during the year to date and only the fifth since the start of this series in 1987.

The net disinvestment by unit trusts of £3 billion in other assets was the largest net disinvestment for this series since it started in 1987.

Net disinvestment of £11 billion in overseas ordinary shares in Quarter 3 2016 was the largest net disinvestment for this series since the first quarter of 2000 (£23 billion).

This release reports on these institutions’ balance sheets at the end of 2015. Total assets were valued at £3,696 billion, compared with £3,655 billion at the end of 2014. This was the smallest annual increase (1%) since 2008.

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).

Every Quarter 3 (July to Sept) release contains annual balance sheet data for all the institutional groups for the previous full year, providing information on the market values of assets and liabilities. Annual income and expenditure data for insurance companies are also reported at this time. This bulletin contains revisions to 2015 data (see background note 6).

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 £8.5 billion. The estimate of total net investment for Quarter 2 (Apr to June) 2016 has been revised downwards by £0.3 billion (see Background note 6 for further information).

An Investment by insurance companies, pension funds and trusts (MQ5) 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. 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 3 (July to Sept) 2016, there was net disinvestment of £15 billion (Figure 1). This was the second occurrence of total net disinvestment during the year to date and only the fifth since the start of this series in 1987. In terms of context, the 5-year quarterly average for this series is net investment of £6 billion. In Quarter 3 2016, net disinvestment was reported in overseas securities, UK corporate securities, other assets and UK government sterling securities. This was partly offset by net investment in short-term assets.

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 3 2016, the overall net disinvestment was caused mainly by disinvestment in overseas ordinary shares (£11 billion) and UK ordinary shares (£8 billion). This was the third consecutive quarter where net disinvestment occurred in both of these asset types. It will be interesting to see if this pattern continues.

For 2015 as a whole, net investment reported by the institutions covered in this release was £28 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 3 2016, there was net investment of £2 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. In 2015, the net investment was £4 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 disinvestment in gilts in Quarter 3 2016 of £1 billion (Figure 3). The 5-year quarterly average for this series is net investment of £1 billion.

Looking at the annual picture, net investment in gilts was £1 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. This 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 increase the stock of purchases of UK government bonds by £60 billion. Since the start of the QE programme in 2009, the Bank has bought £435 billion of gilts.

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 the 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 3 2016, there was net disinvestment of £5 billion in UK corporate securities (Figure 4). This is in keeping with the general pattern of disinvestment since the beginning of 2010 and in line with the 5-year quarterly average for this series. The net disinvestment in UK ordinary shares (£8 billion) was the largest for this series since Quarter 3 2013 (£10 billion).

In Quarter 3 2016, the net investment in other UK corporate securities (mainly corporate bonds) of £4 billion was the largest for this series since Quarter 1 (Jan to Mar) 2012 (£7 billion). This may indicate that investors feel these assets offer a better rate of return over this period, in relation to other instruments such as gilts, where yields have fallen.

Overseas securities

In Quarter 3 2016, the institutions covered by this release reported net disinvestment of £9 billion (Figure 5). This was caused mainly by net disinvestment in overseas ordinary shares (£11 billion), the largest disinvestment for this series since Quarter 1 2000 (£23 billion).

The net disinvestment in overseas securities in the first 3 quarters of 2016 follows 4 consecutive quarters of net investment in this asset type. This may indicate a change in investment strategy and it will be interesting to see if this is the start of a longer-term trend of disinvestment in this asset type.

In contrast to the general trend of net disinvestment in UK corporate securities in recent years, in 2015 businesses reported net investment in overseas securities of £19 billion.

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 3 2016, there was net disinvestment of £1 billion in other assets (Figure 6). The 5-year quarterly average for this series is net investment of £4 billion.

In 2015, the net investment of £24 billion in other assets was the largest for this series since 2011 (£26 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 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 £1 billion in Quarter 3 (July to Sept) 2016 (Figure 7). The 5-year quarterly average for this series is net disinvestment of £3 billion.

The Quarter 3 2016 net disinvestment in UK gilts by long-term insurance companies (£5 billion) continues the trend of disinvesting in these securities, which dates back to the third quarter of 2013.

The net disinvestment in overseas ordinary shares by long-term insurance companies in Quarter 3 2016 (£5 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 investment in Quarter 3 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 3 2016 of £2 billion (Figure 9). In terms of context, the 5-year quarterly average for this time series is net investment of £4 billion.

In 2015, self-administered pension funds reported net investment of £14 billion, caused mainly by net investment of £20 billion in UK government sterling securities, following net investment of £14 billion in 2014 and £17 billion in 2013. These are the highest levels of annual 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 Quarter 3 2016, investment trusts reported net disinvestment of £1 billion. The 5-year quarterly average for this series is 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.

In Quarter 3 2016, unit trusts and property unit trusts reported net disinvestment of £2 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). It should be noted that income and expenditure data are not currently collected for the trusts institutional group.

Long-term insurance companies

In Quarter 3 (July to Sept) 2016, the value of claims was £35 billion. The 5-year quarterly average for this series is £38 billion. In the same period the value of premiums was £30 billion. The 5-year quarterly average for this series is £29 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

For general insurance, premiums (£9 billion) were around 69% greater than the value of claims (£5 billion) in Quarter 3 2016 (Figure 12). The difference between the value of premiums and claims is at its largest since Quarter 2 (Apr to June) 2012.

Self-administered pension funds

Contributions to self-administered pension funds (net of refunds) in Quarter 3 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 3 2016 were £15 billion. The 5-year quarterly average for this series was £13 billion.

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 2015 was valued at £3,696 billion. This compares with £3,655 billion at the end of 2014 (Figure 14). This increase of 1% was the smallest annual growth in the level of total assets held by these institutional groups, since 2008 (the last year in which total holdings decreased).

Between 2014 and 2015, the value of asset holdings rose for each of the 5 asset types except for UK corporate securities (Figure 15) which decreased by 3%.The value of asset holdings increased for other assets (by 4%), overseas securities (by 2%), UK government securities (by 2%) and short-term assets (by 1%).

In 2015, overseas securities continued to be the largest asset type as a proportion of total holdings (31%). This asset type has increased its contribution to total holdings in each of the past 4 years (Figure 16).

Between 2010 and 2015, short-term assets as a proportion of total holdings increased from 11% to 15% and UK government sterling securities increased from 12% to 14%.

The value of UK corporate securities, as a proportion of total holdings, decreased from 28% in 2010 to 22% in 2015. The contribution of this asset type to total holdings has decreased in each year since 1997. Between 2010 and 2015, the contribution of other assets to total holdings decreased from 19% to 18%.

Balance sheet estimates for the end of 2015, showed that the value of overseas ordinary shares held by the institutions covered by this release continued to exceed the value of UK ordinary shares (Table 5). This trend was seen for the first time in 2010 (this time series started in 1964) and may suggest that investors feel overseas share markets offer a more profitable return.

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”.

In 2015, “mutual funds and assets not elsewhere classified” comprised 79% of the other assets total, broadly in line with estimates in previous years (Table 6).

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