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Foreword (partial) "In early 2013, the Bank established the Procyclicality Working Group (the membership of which is set out overleaf) to examine the question of whether, and if so why, insurance companies and pension funds invest procyclically. The group defined procyclicality as follows: - First, in the short term, as the tendency to invest in a way that exacerbates market movements and contributes to asset price volatility, which can in turn contribute to asset price feedback loops. Asset price volatility has the potential to affect participants across financial markets, as well as to have longer-term macroeconomic effects; and - Second, in the medium term, as a tendency to invest in line with asset price and economic cycles, so that willingness to bear risk diminishes in periods of stress and increases in upturns. A tendency by insurance companies and pension funds to invest procyclically in the medium term might deepen the troughs and exaggerate the peaks of asset price or economic cycles in a way that is potentially detrimental to financial stability and long-term economic growth. In the course of its analysis, the group also examined a number of longer-term structural issues and trends in the asset allocation behaviour of insurance companies and pension funds, going beyond procyclicality. These trends are also relevant for the willingness of insurance companies and pension funds to bear risk in the longer term, and are therefore significant for the appropriate allocation of capital in the real economy. This paper sets out the results of that work. It includes analysis of some of the possible drivers of asset allocation behaviour by insurance companies and pension funds, as well as examining evidence from academic literature and a number of case studies undertaken by Bank of England staff."

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