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Funds brave-up for risk: Towers Watson

It’s not really news but it’s comforting to have your observations confirmed when the annual Global Pension Asset Study is published. The Towers Watson report for 2010 shows a hiatus in the swing away from equities, stronger growth in Asia-Pacific than elsewhere, and a greater focus on risk by the major funds in the world’s top 13 pension markets.The report, published this week, details the growth of pension assets last year, as markets helped the recovery process around the world, asset allocation trends and what the funds are concerned about for 2011 and beyond.

Asset allocation averages did not change much last year, with equities enjoying a fillip from their longer-term decline and bonds remaining unchanged. Funds became braver in the reduction of their cash exposures.

The average global asset allocation in the largest seven markets was 47 per cent equities, 33 per cent bonds, 19 per cent other assets including real estate and alternatives, and only 1 per cent cash. The US remained the most reliant on domestic equities, with an average of 70 per cent, but this was down from 80 per cent 10 years ago.

In terms of the country league table, the main change was Australia moving up one place from fifth to fourth, helped by a strong currency. The study is in US dollars.

The top seven countries as of the end of last year are: US, $15.265 trillion (104 per cent of GDP); Japan, $3.471 trillion (64 per cent); UK, $2.279 trillion (101 per cent); Australia, $1.261 trillion (103 per cent); Canada, $1.140 trillion (73 per cent); The Netherlands $1.032 trillion (134 per cent); and Switzerland, $661 billion (126 per cent).

Towers Watson says in its commentary that the main things to watch out for in 2011 are:

. Risk management – increased attention to risk and risk management processes

. Managers – less emphasis on tracking error and more on scenario risks

. Defined-contribution funds – focus on risk exposure in investment defaults and design of lifestyle strategies

. Cost structure – more negotiations on fees, seeking to improve alignments through better fee design, and

. Governance – growth in fiduciary management appointments.

Roger Urwin, Towers Watson’s global head of investment content, said that post-financial crisis, there was the opportunity to accelerate the many positive developments around defined contribution pensions, such as the effective design and management of default strategies in line with member needs and risk tolerances.

The longer-term trend for governance involves further change in organisational design, such as non-executive boards, delegated executives and fiduciary management.

The consulting firm says other longer-term trends include: constant reshaping of the way risk is understood; more managers with smaller mandates put together by a defined portfolio construction process; aggregation to lower costs and improved technology delivering life-planning tools; and, more effective structure which holds managers to account in a more disciplined form and presents a better balance between asset owners’ internal resource and their external agents.

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