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'Return-seeking' assets favoured by schemes

UK - Four out of five final salary scheme sponsors still favour a significant exposure to ‘return-seeking investments' despite recent market volatility, a study by Watson Wyatt suggests.

A survey of company executives, responsible for defined benefit pension funds with combined assets of £70bn (€103bn), found those questioned would prefer to hold at least 40% of their current funding position in ‘return-seeking' assets such as equities, property, hedge funds and private equity, with 43% stating they would prefer to allocate between 60% and 90% to return-seeking strategies.

Almost one-third (31%) also said they would not change this position if their funding status improved, but two-thirds (66%) say they would move to liability-matching assets to reduce risk.

Interestingly, four in 10 said they were most concerned about the impact of life expectancy improvements, while 26% said they were worried about a fall in equity prices and another 26% said they were concerned about a fall in bond yields.

Graham Mitchell, senior corporate consultant at Watson Wyatt, believes there is demand for some form of longevity insurance if the market can deliver it.

"Unexpected improvements in mortality are of greatest concern to executives," said Mitchell.

"While the longevity insurance market in its infancy, companies know that to protect themselves against this risk they are likely to have to pay the full price of an insurance company buyout. This includes the effect not only of the revised asset allocation, and insurance company profit margins, but carries with it the need to meet the higher solvency requirements of insurance companies. These results suggest there is significant demand for longevity insurance if suitable products can be devised," he added.

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