GLOBAL - More than a third of US pension schemes reduced their domestic equity exposure last year, with many saying the trend away from local stocks would continue well into 2011, according to Aon Hewitt.

The survey of almost 230 schemes in the US, with assets of $389bn (€271bn), also found that funds were switching to liability-matching investments in an effort to combat volatility.

The consultancy added that government bonds were falling out of favour, with only 13% planning to increase exposure at a time when several countries have been battling rumors of a sovereign default, while long-duration bonds fared better, with almost a third expressing an interest in the asset class.

Ari Jacobs, retirement strategy leader at Aon Hewitt, said liability-matching investments continued to grow as a share of overall assets, having once been seen as a “strategic idea” with few schemes initially adopting it, while 38% opted to reduce US equity exposure.

“Regardless of the future direction of equity and bond markets, this shift should bring less volatility and greater predictability to pension plan costs,” he added.

Pension funds were also increasingly opting for a dynamic investment strategy - for example, reducing risk as the plan funding status improved.

More than three-quarters of plan sponsors viewed this ‘glidepath’ approach as sensible, with 29% planning to implement such a policy in the next 12 months.

Jacobs said of the growing interest: “This strategy is a smart way to harness market volatility for the benefit of the plan and the sponsor because glidepaths can potentially reduce cost even as they reduce risk.”

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