GLOBAL - Pension funds are exposed to more risks now than at any point in the last 30 years, according to Watson Wyatt's latest Global Investment Review 2003.
The risks pension funds face have little to do with the funds themselves but with the way the economy and investment markets are moving.
According to Watson Wyatt, the global pensions crisis continues to gather pace following three years of falling investment markets and the rising costs of liabilities.
The pressure on companies has increased significantly during the past year with funding levels of pension schemes plummeting to lows not seen before and new accounting disclosures emphasising the size of funding gaps.
The report suggests that exposure to equities will continue to be a topic of hot debate, with equity risk having doubled since 1997 and volatility having increased to about 20% a year. Watson Wyatt is recommending to many of its clients that they diversify away from equities into other assets such as property, high yield and emerging debt, and hedge funds. It also says that pension funds should consider a less static form of asset allocation and to adapt their benchmarks to reflect big shifts in bond and equity valuations.
“We recognise that this represents a major policy shift for most funds and may require a significant increase in governance,” said Roger Urwin, global head of the investment practice at Watson Wyatt.
“But lower risk should be the result without giving up much return.”
The report also states that companies around the world are systematically transferring risk to their employees through moving their pension schemes to defined contribution models. This move, which Watson Wyatt says may have good financial rationale from the employers’ perspective, has become fashionable, but questions whether it will sufficiently motivate employees or address future pension problems.
“A sound long-term DC strategy should be influenced by the future earnings power, circumstances and the goals of each individual. It is this added human element that makes DC plan design particularly challenging. A one size fits all is suspect,” said Urwin.
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