EUROPE – With a third of continental European pension funds underfunded, schemes are cutting their government bond allocations, according to a survey from Greenwich Associates.

“More than a third of continental European pension funds do not hold enough assets to fully fund estimated future benefit obligations - despite the market recovery of 2003 and the fact that many corporate plan sponsors made hefty contributions to their pension plans last year,” Greenwich said.

The firm said European government bonds shrunk to 25% of overall continental institutional assets at the end of 2003 from 27% the prior year. More than 30% of respondents said they expect government bond allocations to fall further by 2006.

“Continental plan sponsors deserve to be complimented for the responsible steps they have taken to stabilize their situation after the market debacles of 2000 to 2002,” said Greenwich Associates consultant Chris McNickle.

“But Europe’s institutional investors should not be lulled into a false sense of security - they have very conservative asset allocations and ageing workforces that will continue to increase liabilities.

“While their commitment to their final salary plans is commendable, they should note that in the UK similar conditions have resulted in the closing of half of all defined benefit plans to new employees.”

Greenwich said solvency concerns, and sponsors’ dedication to their final salary plans, suggest that European institutional investors will need to increase investment returns in order to keep up with their future obligations.

“Recognizing this need, many institutions have taken steps with regard to asset allocations and investment managers that would have seemed radical just a few years ago.”

The report found an “unprecedented spate of manager hiring and firing” – with speciality managers winning out over balanced.

Allocations to private equity and hedge funds remained roughly unchanged at one percent each. McNickle said many funds “lost their nerve” about alternative assets.