Europe pension funds buying inflation protection-poll

LONDON May 3 (Reuters) - One in four European pension funds is buying instruments to protect their portfolio from rising inflation, while many funds are looking to raise exposure to government bonds and riskier debt, a survey showed on Tuesday.

Investment consultancy Mercer said its survey of over 1,100 European pension funds with assets of over 550 billion euros ($812 billion) found 80 percent of respondents are now more concerned about the threat of rising inflation than they were last year.

The survey also showed 18 percent of respondents are planning to increase their allocation to inflation-linked bonds, five percent are allocating to inflation-sensitive assets and three percent to inflation swaps.

Twelve percent of respondents have taken other action such as introducing a series of triggers that, once hit, will increase their allocation to inflation bonds or swaps.

"The use of loose monetary policies and quantitative easing has created the ideal environment for the re-emergence of inflation, which is a cause for worry for many pension funds," said Tom Geraghty, Mercer's head of investment consulting for Europe, Middle East and Africa.

"Pension funds also need to understand the extent to which their liabilities are affected by higher inflation. In some cases, inflation caps may mean that higher inflation is less negative for pension schemes than might be expected."

Equity allocations have declined in Ireland and Britain.

Allocation to stocks fell to 47 percent in Britain from 50 percent in 2010, posting a 20 percentage point decrease since the survey started in 2003.

Most of the reduction happened within the domestic equity portfolio, which fell to 21 percent from 28 percent in 2009.

Irish funds have seen a record reduction in average equity allocations since 2010, dropping to 50 percent from 59 percent.

Allocation to equities across the rest of Europe remains low, particularly for many funds in Germany which hold just 5 percent due to local regulatory restrictions.

In the Netherlands pension funds hold an average equity allocation of 26 percent and in Switzerland 30 percent.

Over the next 12 months, 23 percent of European funds and 35 percent of UK funds plan to reduce their exposure to domestic equities, whereas around 20 percent of all funds plan to increase their exposure to domestic government bonds and/or non-traditional asset classes.

"The steady move away from equities has meant that larger plans throughout most of Europe now have significant exposures to domestic government bonds," said Crispin Lace, partner in Mercer's Investment Consulting business.

"However, with bond yields at historically low levels the desire is now to diversify the bond exposure to increase the level of yield within this portfolio. Many pension funds are therefore considering alternative debt markets such as high yield and emerging market debt and also some opportunistic ideas such as distressed and mezzanine debt."

European funds are looking to increase their strategic allocation to a wide range of non-traditional asset classes. On average 22 percent of European funds and 11 percent of UK funds intend to increase their allocation to emerging market debt.

Over 6 percent of European funds and 7 percent of UK funds plan to further diversify across debt markets through allocating more to distressed debt.

A Reuters monthly poll of European investment funds showed on Tuesday investors reduced equity holdings for a third month running in April, adding bonds and cash as they grew cautious about the impact of soaring oil prices on the economy [EUR/ASSET]. (editing by David Stamp)