EUROPE – Roger Urwin, global head of investment at Watson Wyatt LLP, says he expects UK pension schemes to lower their equity exposure in favour of bonds.
“There is no one-size fits all answer to how pension funds should invest their assets to control risk,” Urwin said. “Each fund has its own unique characteristics.”
Writing in a newspaper article, he said: ‘But looking forward, we expect UK funds in general to shrink their equity exposures and increase their bond weightings, but market conditions will be a big factor in determining when this happens.”
Urwin also said the firm saw growth in the use of alternative asset classes - prompted by the desire to “wring out more return from less risk”.
He said that according to Watson’s own research, the average company in the FTSE 100 index has a pension fund “Value at Risk” of three percent of market capitalisation – of 34% of one year’s pre-tax profits.
Urwin said: “The conclusion from this research is that the pension fund is a material risk consideration to almost all companies in the sample and is a huge issue to a significant minority.”
Meanwhile, AXA Investment Managers said it has found that some schemes are taking on 40% more risk than they need to get the same expected return.
It looked at the asset allocation of the top 350 UK defined benefit schemes and found that “whilst there are a few schemes at or near an optimal asset mix, most appear to be some way from extracting maximum value from their assets”.
It said: “The challenge is how to build a portfolio that includes these assets, but which continues to match the schemes’ risk tolerance criteria.”
“Our high-level analysis suggests that, in general, UK defined benefit schemes are not diversifying as much as they could, or indeed arguably should,” said Joanna Munro, head of UK institutional business development at the firm.
“For immature schemes, implementing ‘enhanced’ strategies makes sense, because they enable schemes to generate real returns in the long run.”