AUSTRIA - Pensionskassen should have put more money into equities last year in order to get better results, consulting firm Mercer has suggested.

Comparing pension funds in eight European countries, Mercer concluded the higher the equity exposure in 2006 the better a pension fund's return would be.

That said, the strategy is not a simple one for Austrian Pensionskassen to follow as they are restricted in their asset allocation mainly by customer wishes as members are allowed to choose between certain levels of equity exposure.

"Taking the relatively low equity exposure into account, our result for 2006 was 'presentable', Christian Böhm, head of the Austrian pension fund association (FVPK), told IPE.

"Of course, it could always have been better. A lot of people do not want to put more than one-third of their portfolio into equities. However, among institutional investors in Austria we have one of the highest equity exposures with some insurers only investing 10%," he said.

Austrian Pensionskassen portfolios are, on average, 37.3% invested in equities, while 60.6% is in bonds. Exposure to equities is similar in Spain, at 37.1%, while it reaches 39% in the Netherlands and 30.7% in Switzerland, according to the Mercer study.

Mercer noted this group of countries only achieved returns of between 5.25% and 7.4% for last year, while Belgium - with an almost 50% exposure to equities - or the UK - with a 63.8% exposure - achieved 8.4% and 10.5% respectively.

The consultants also argued Austrian funds were the worst performers in the group as lower equity exposure returned 5.25%, along with a lack of ALM studies and diversification blamed in the process.

Average exposure to real estate among Austrian Pensionskassen is 2.11% while alternative asset classes still make up less than 1%. In Switzerland, real estate investments make up 17.5% of the average portfolio and alternatives 3.3%, while in the Netherlands the same exposure is 13% and 3% respectively.

Böhm points out investment in alternatives - similar to equity exposure - is mainly limited by customer demand.

"But the asset allocation is changing. Austrian Pensionskassen invest more in real estate than ever before and they are carefully adding alternative asset classes in order to increase diversification," he added.

Commenting on the alleged lack of ALM studies, he also noted under the new risk management regulations, which have recently taken effect, asset liability studies are being used by Pensionskassen if they had not already done so before.

"However, asset liability matching is not everything. First of all you always have to look at the market because people close to retirement cannot invest everything in bonds in a year when interest rates are rising and bond yields are falling," added Böhm.