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Pension funds buying innovation - Watson Wyatt

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GLOBAL - Pension funds have become buyers of innovation as they seek to meet their liabilities, according to Roger Urwin, global head of investment consulting at Watson Wyatt.

Writing in the firm's new Global Investment Review, Urwin said he saw a change in that pension fund sponsors have become more engaged in the "pension fund investment challenge".

"The second big change is that pension funds have become buyers of innovation," he added. "The new solutions they are considering - increasingly derivatives-based, frequently absolute rather than relative return in character - are more aligned to meet pension liabilities."

"At the cutting edge, funds have departed from traditional divisions and constraints in strategies by separating market-based from skill-based returns - in the jargon of the day they are 'porting' alpha and beta."

Urwin said this last change is in its infancy "but will be big".

"It is possible that pension funds, in employing professional specialists, will divide the responsibilities for managing risk and return differently in future."

He pointed out that investment banks are edging into the space traditionally occupied by investment managers while consultants are exploring new strategies. "More competition is healthy. What funds need, though, is a better joined-up proposition from their line-up pf providers - in short, better teamwork."

The firm said that pension liabilities represent over 30% of the market capitalisation of a typical German company and around 20% for typical UK and Japanese companies. And for a typical US or Swiss company, pension liabilities represent around 15% of market capitalisation.

Watson has researched around 1,600 mid and large-cap companies.

"The burden of debt is weighing increasingly heavily on corporate finances, affecting credit ratings and analysts forecasts and making takeovers, re-financing and capital-raising more problematic," Urwin said.

Earlier this week Watson Wyatt said that UK pension funds have continued moving to alternative and unconstrained investment. It said that in 2004, UK pension funds that it advises awarded 32 alternative investment mandates - double the 16 awarded in 2003.

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