IRELAND - Hewitt has urged defined contribution (DC) pension funds to invest more heavily in short-term government bonds, as it predicted the long-term downturn in interest rates would reverse.

Examining the state of Irish pension funds in its half-year InVision survey, the consultancy said that with the long-term downtrend in interest rates reversing, investing in fixed income would be a harder sell.

The report added: "Defined contribution investors still attracted to the volatility dampening characteristics of bonds should probably focus on the shorter end of the yield curve, investing for five years instead of 10 or 30."

However, it said defined benefit (DB) schemes should continue to pursue long-dated bonds as they best matched the liability profile of the scheme.

"Investors should also consider investing with an active manager who can better negotiate the ongoing sovereign debt crisis," Hewitt said, adding that this was preferable to a passive manager who was "tied to tracking an index".

Deborah Reidy, director of investment consulting, added that investors should consider multi-asset funds as part of their investment strategy, as figures showed the best-performing fund returned 6.5%.

However, she added that, with a range of almost 11% between top and bottom-performing funds, as well as the greater variety of assets on offer, investors needed to be prepared for substantially different performances between each vehicle.

"Investors should be aware of the underlying exposure of their funds to understand how market movements will affect the overall performance," she said.