EUROPE - Mainstream asset classes are "under threat" from alternatives as risk-averse European pension schemes diversify into more exotic asset classes in a bid to mitigate market volatility, according to ratings agency Fitch.

Speaking on changing investor needs at a recent Paris conference, EMEA head Aymeric Poizot and Fitch director Charlotte Quiniou forecast a future pensions market dominated by renewed market volatility, resulting in more regulation and risk aversion.

The speakers suggested mainstream asset classes were "under threat" from defined contribution (DC) schemes moving away from portfolios dominated by bonds and equities.

In a survey of pension plans looking to increase their allocation to alternative investments, funds of hedge funds topped the poll for mainland European pension schemes, followed by private equity funds of funds and emerging market debt.

Among UK pension funds, the top two favourites were global tactical asset allocation and emerging market debt.

For providers, this offers opportunities within the diversification bucket, with original betas and alternatives products, the speakers said.

Despite the high volumes of European pension assets - €3.5trn - Poizot and Quiniou pointed out that 95% of assets are concentrated in the UK, the Netherlands and Switzerland.

DC schemes currently make up around 40% of the European total, but with significant variation across markets.

In Switzerland, they made up 60% of the market in 2010, up from 48% in 2000.
In the UK, they make up 40%, up from 3% in 2000.

In contrast, defined benefit schemes still make a 94% of the Netherlands market, down from 98% in 2000.