Drift from equities in mature markets
The head of investment at consultants Watson Wyatt, Roger Urwin, says there is a gradual move to lower equity allocations in mature pension countries.
“In countries with maturing pension funds there seems to be a gradual move to lower equity allocations,” says Urwin, global head of the consulting firm’s investment practice.
This will be driven in many countries by the need to pay higher pension amounts to ageing populations through cash-flow generating assets such as bonds according to the consultants.
“Similarly, the quest for alternative sources of alpha is increasing and will also persuade funds and sponsors that equities may not be worth the risk.
“These factors work over different time scales in different markets, but overall we expect pension funds strategy to continue to have equities as a key asset class, but not necessarily the dominant asset class.”
The comments came as the firm released research which found that total institutional pension fund assets in the 11 major markets rose by more than 12% to $14.2trn (EXXXtrn) last year.
It found that average allocation to equities was around 50% of total assets – down from a high of 61% in 2001.
The figures came in an annual global survey of Germany, France, Ireland, the Netherlands, Switzerland, the UK, Australia, Canada, Hong Kong, Japan and the US.
“It is reassuring to see the three-year trend of shrinking assets and rising liabilities has been checked and a better trend may be emerging,” Urwin says.
“However, the damage to global pension funds has been severe and recovery to full funding levels, even if equity markets continue their upward movement, is very likely to be several years off.”
Watson Wyatt found there was an average fall in funding levels of over 20% for the five-year period up to the end of 2003 – put down to lower equity markets and interest rates.
According to the survey, global pension fund assets have increased by 7% a year over 10 years, but more than three-quarters of that growth occurred in the more favourable market conditions of the five years from 1993 to 1998.
Watson has also released a survey in the UK which found that the recovery in equities over the past year had been “largely cancelled out” by increases in liabilities under the controversial FRS17 accounting standard.