EUROPE - Better governance and risk management, along with increased allocations to alternatives and liability-driven investment strategies are the main agenda points in 2008 for European pension funds, consultancy firm Mercer has found.

The survey, which looked at 849 UK pension funds with assets totaling (€379bn) (£265bn), and 255 European funds with assets amounting to €159bn, identifies there is been an increased number of schemes with investment committees compared with last year, and there has been a rise in the number of schemes assessing their investment strategy between formal reviews.

Funds' greater focus on risk management covers both risk reduction and more efficient management of existing levels of risk, resulting in a broader series of risk exposures for diversification reasons, while a wider range of asset strategies attract capital.

Mercer found in the UK risk management is likely "to manifest itself in the form of overlays and fund-specific benchmarks for bond mandates".

Moreover, around one in 10 funds told the firm it is interested in adding exposure to fund of hedge funds, active currency and global tactical asset allocation (GTAA), though "interest in non-traditional strategies is not universal, with commodities, infrastructure and private equity unlikely to see much asset flow".

Other signs of a greater focus on risk management is the shift of UK pensions assets away from equities over 2007, in the order of around 3% of the fund assets.

In contrast, European pension funds have moved towards allocating more to equities last year, as the average allocation reached 50% in 2008, up from 42% at the start of 2007.

According to Mercer,  "Eurozone equities have become the de facto ‘home market' opportunity set in France, Germany and Spain, replacing the opportunity set represented by ‘national champions' listed on the local exchange."

The consultant added this trend is not quite as clear in Ireland, where explicit allocations to the Irish, UK and American markets are often held alongside the Eurozone allocation.

The survey also found Swiss and Dutch funds have an almost equal split between local and global equities, though many Dutch funds continue to use currency hedging, which is much less common elsewhere  in Europe.

Lastly, the survey showed there was an almost doubling of schemes expected to have LDI strategies in place by the end of this year.

Andrew Kirton, head of Mercer's investment consulting business in Europe, commented: "Investing relative to the liabilities - whereby the amount and nature of risk taken on is assessed relative to the liabilities - has much to commend it, at least in terms of a frame of reference for decision-making, where solvency and/or maturity considerations are important in markets such as the Netherlands, UK and Ireland."

PricewaterhouseCoopers (PwC) today said in a separate study UK pension schemes still have some way to go in terms of implementing governances policies effectively.

"Two-thirds (66%) of trustee boards monitor, review and update their risk registers regularly, up from 21% two years ago. However, many chairs have expressed considerable doubt about the effectiveness of their approach," said PwC.

According to the study, nearly all say they have been hit by unforeseen risks, whether triggered by the activities of the sponsoring company or by external factors such as investment markets.

"Some feel their register is little more than a ‘tick box' exercise, rather than a system enabling the trustee board to enhance its effectiveness by spending more time on the most important issues," concluded the survey.

If you have any comments you would like to add to this or any other story, contact Carolyn Bandel on +44 (0)20 7261 4622 or email carolyn.bandel@ipe.com

Topics