EUROPE - Inadequate solvency levels are forcing more and more European pension funds to step up equity allocations and alternative and global investments in an effort to boost returns.
Funds are also reviewing their use of absolute return strategies.
With solvency ratios averaging just 92%, Europe’s funds are having to rethink strategies after a period of disappointing market returns, according to a study by US-based consultancy, Greenwich Associates.
Given that their equity allocations are roughly 20% of their assets, and that fixed-income rates are at or near historic lows, it is difficult for a lot of plan sponsors to see how they will be able to cover their obligations to beneficiaries - except by obtaining large contributions from employers,” said Greenwich consultant, Berndt Perl.
Greenwich interviewed 282 fund professionals for its 2003 study of continental european investment management.
While pension funds in other major markets have also suffered large losses over the last three years, Europe’s solvency ratios remain substantially lower than those in North America and the UK.
Almost 60% of the large continental pension funds that disclosed their ratios reported that they are technically insolvent, according to the Greenwich report.
The effects of the global equity market collapse have been more acute in Europe for three reasons,” explained Perl.
“First, declines in continental stocks were more dramatic than anywhere else in the world except Japan. Second, continental institutions shifted out of fixed income and into equities in the late ‘90s and were harder hit by the bursting of the ‘bubble’. And, third, regulatory requirements in various continental markets forced funds to sell stocks at unfavourable times.
Although most european institutions scaled-back their equity holdings during the last six months, almost 50% more institutions now expect to increase their allocations to European equities over the coming year. This is likely to be at the expense of European government bonds, although many anticipate using more corporate and non-European bonds.
The wrong lesson of the disastrous equity market returns of the past three years is that ultra-conservative is good, said Chris McNickle, another Greenwich consultant.
A long-term asset allocation balanced between equities, fixed income, and possibly alternative investments, based on your time horizon and risk tolerance, continues to make sense.
Many European institutions are also planning to raise their alternative investments. During the next three years, nearly 10 times as many investors expect to increase their use of hedge funds as decrease, and six times as many expect to use more private equity than expect to use less.
A recent study by that Financial Times newspaper showed that European pension funds are already way ahead of their more reticent UK counterparts when it comes to alternative investments. A main advocate includes Dutch giant ABP, the e146bn public pension fund, which plans to allocate e2bn-2.5bn in 20-40 single-manager hedge funds and fund-of-funds between 2003-2006.
The report also showed that salaries for European investment professionals remained steady last year while bonuses fell slightly.
PwC, KPMG, EY and Deloitte must break up their consultancy and audit businesses into distinct firms to provide greater focus on the "most challenging and objective audits", the competition watchdog has said.
The Department for Work and Pensions (DWP) has released its first batch of guidance setting out how the guaranteed minimum pension (GMP) conversion legislation may be used to resolve unequal payments.
This week's top stories include the government spending £800,000 on a Gogglebox advert and MPs writing to The Pensions Regulator about its engagement with the Railways Pension Scheme.