EUROPE - Allocation to alternative assets will increase in 2008 and Dutch pension funds will continue to seek real returns as German corporates' appetite for funding grows, investment bank Lehman Brothers has suggested.
In its latest semi-annual European Pensions Briefing, Lehman has reviewed the pensions market in the UK, Germany and the Netherlands in 2007, and provides an outlook for 2008.
Investment themes for 2008 in the UK are, among others, a continued hedging of liabilities through liability-driven investment (LDI) approaches and an increased diversification into alternative assets, particularly to infrastructure assets and environmental funds, at the expense of equities, predicts Lehman.
The briefing, designed to provide analysis of investment topics for those involved in the financial management of pension liabilities, foresees Dutch pension funds continuing to show interest in assets and strategies that generate a high real return and/or link with indexed liabilities.
"In fixed income, we expect to see allocations increase towards high yield and emerging markets, with some funds looking for opportunities stemming from the current credit turmoil to pick up high quality assets at distressed levels," the report suggests.
Lehman also expects increased demand for inflation-linked assets, a continued shift in favour of emerging market equities, and more use of ‘enhanced' indices and active strategies to generate alpha.
Germany's corporations, meanwhile, will continue the trend of funding their pension schemes, not only in terms of those with existing funding programmes but also those who current rely purely on the book reserve system.
"Similarly we expect to see an increase in the assessment and implementation of ‘derisking' strategies", says the report, adding: "Corporates who have already implemented these steps and who, indeed, have started addressing their balance sheet risk from their German plans, will then start to turn their attention to the group balance sheet risk emanating from pensions."
This will not be with regards to their headquarter pension arrangements, but instead their global pension arrangements, predicts the investment house.
More generally, the report discusses the increasing use of alternatives by pension funds, and the growing correlation between different alternative asset classes.
Lastly, the briefing includes the Lehman Brothers Pension Fund Solvency Indicators, which aim to improve the application of current market data to the specific situations of pension funds.
In both the UK and in Germany, the study found volatility has increased for unhedged funds, yet decreased for those who have hedged liabilities.
In the Netherlands, volatility has increased slightly for both unhedged and hedge funds, concluded Lehman Brothers.
Contact Lehman Brothers to obtain a copy of the report.
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