GLOBAL - Lifestyle defined contribution pension funds have prove their worth in the current economic turmoil and may be a useful counterbalance to compulsory annuitisation, Watson Wyatt has claimed.

According to Watson Wyatt's 2008 Pension Plan Survey, more than 90% of workplace defined contribution (DC) schemes have a default fund involving lifestyling - rebalancing members' investments by mixing equity and fixed-income investments to reduce risk as they approach retirement age.

The consulting firm does not have any figures at this stage to show what people investing in default funds retired on 10 years ago compared with today, but is in the process of collecting data.

But Paul Macro, senior consultant at Watson Wyatt, said he was confident well-designed default funds could alleviate the financial crisis in any review of the rules concerning compulsory annuitisation.

"Good pension scheme design has made the problem that the politicians are seeking to address much smaller by ensuring that many people are not vulnerable to huge stock market swings when retirement is just around the corner."

Watson Wyatt's survey, which collected data from 11 countries with total pension assets of almost $25bn (€18.3bn) revealed the UK's DB/DC split for 2007 was 66% and 34% respectively.

DC assets currently represent 44% of total pension assets, however, with the United States, Australia and Switzerland showing the largest portion of DC assets.

The average growth rate for total DC assets over a 10-year period from 1997 to 2007 was 10% compared with a growth rate of 5% for DB assets, reflecting the trend to move towards DC schemes, according to Watson.

Countries with the largest portions allocated to more risky assets included the US, the UK and Australia, while Japan and the Netherlands allocated the largest portions to more conservative strategies.

The Survey highlighted six main changes likely to affect pension funds in the future:

 increased use of Liability Driven Investment approaches  increased use of absolute return mandates and alternative assets, Alpha Beta separation and integration Beta prime innovation reduction of DB fund's risk budgets and increased power to influence pricing and product design.

The downside to lifestyle DC funds, of course, is they place all of the risks on the individual members.

Not all pension fund experts are in favour of lifecycle funds, as PFZW, the Dutch industry pension fund for healthcare and welfare sectors, criticised lifestyle investments earlier this year for breaking the system's solidarity.

Peter Borgdorff, head of PFZW, feared lifestyling would lead to a growth in individual defined contribution plans that would place all risks on their members. (See earlier IPE story: PFZW fund adds voice to life cycle critique)

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