GLOBAL - State Street is predicting the changing landscape of pensions could mean "similar countries" may in the future merge their pensions systems or see DB providers offer annuity-style protection to non-members from a DC background.

Details of its third annual Pensions Industry Vision report - entitled Bridging the gap - notes while some government recognise more needs to be done to improve pensions funding liabilities and pensions stakeholders are acting to improve risk management, the growth of global workforce mobility and moves towards measurable personal pension accounts means pension arrangements need to be more transparent and open to overseas investment opportunities.

More specifically, State Street suggests "the day may come when globalisation encourages similar countries to merge their pension systems to their mutual economic advantage, or at a minimum, when major DB providers offer annuity-style security to non-members from a DC environment".

No further details are given on which countries might be most appropriate to consider such a move or where DB schemes might be capable of extending its pension management services to non-members.

But according to the global custodian and investment house, improved efficiency levels and transparency in communicating individuals' pension savings would require "sophisticated administration systems" but this is already achievable in some countries where retirement fund valuations, covering all sources of income, are available online.

Focus of the study is on both the governance and investment strategy of pension plans in North America and Europe, as well as legislative and market developments across the global stage, to ascertain what schemes and countries are doing to bridging what is still a huge funding gap, said Wade McDonald, State Street's senior vice-president and head of customer management of investor services UK, Middle East and Africa.

"There is still some way to go about the honesty and realism regarding the funding gap and pensions, throughout the regions. If we are going to close that gap, a revolution needs to take place at all levels in the chain: state, employers, pensioners, all levels.

"The demographic point is accelerating the need to deal with pension provision, we need to ensure the right platform is in place. We need the right platform in place now to deal with the future challenges we all face.

He further added: "In terms of [defined] contribution levels, it is clear something needs to be done to ensure participants know there is a greater sense of urgency. But there are good examples of good practice in the Netherlands and Sweden (PPM)."

According to State Street's assessment, global pension liabilities are still six times higher than the actual amount saved.

That said, more established pensions regimes in Europe and the US are shifting their investment strategies to reduce the liability risk by acting on their liability mismatch and adjusting investment strategies where appropriate.

Its own survey of US and European pension funds in June and July last year - so prior to the credit crunch - reveals approximately 10% of UK-based schemes now operate under a liability-driven strategy and there is an increasing growth of absolute return investing.

At the same time, there is also an increasingly rapid division of alpha and beta strategies among pension funds, said Joseph Moody, head of LDI at State Street Global Advisers, although its own research suggests pension funds are prepared to adopt 13030 strategies, a move which Moody considers to be " a conflict" as he defines 130/30 combining both alpha and beta.

"Pension funds are becoming more intolerant of middle-of-the-road strategies. The division of alpha and beta will become almost universal. People are prepared to differentiate costs more greatly. Further innovation in the beta space will take place and eat into the alpha space. It is very difficult to maintain and charge excessive fees for it.

"There will be a reflection of more flexibility in the mandates. Retirement fund clients will allow greater flexibility in return for more openness on how risks are managed. Interestingly, people are prepared to pay even more for alpha," he added.

A breakdown of the survey found LDI, which has grown in popularity within European pension funds, is now "crossing the Atlantic" according to Moody, but 63% of European schemes still spend more than 21% of their time and resources focusing on managing the risk inherent in the fund versus the returns of the fund.

This is especially interesting as 51% of those European funds said investment risk was their greatest risk in managing the pension scheme,

At least 59% also said they would use LDI to manage longevity risk - even though Moody notes "to make that happen we need considerable development" and he believes there is little sign of it being "just around the corner" - and another 28% said they would like to use longevity bonds, even though the market is again struggling to develop because each pension fund essentially has differing requirements from longevity bond terms, added Moody.

While pension funds are doing everything they can to reduce liability risk through new ideas in investment strategies, scheme officials - who have essentially become "risk managers, looking at all types of market" according to Moody - are now more likely to change the terms of the scheme and benefits to meet that goal, even if it is an unpopular move with members.

"Pension funds will more likely target [longevity risk] by altering the rules and changing scheme structure. The funding ratios have fallen dramatically, so as a result their buyout potential has gone away. I don't think we will see it again for another 2-3 years," added Moody.

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