European funds look to alternatives to manage future risk

European pension schemes are increasing their allocations to non-traditional asset classes as a way to manage risk as a result of turbulent market-prompted investment reviews, according to Mercer’s annual European Asset Allocation Survey.

The survey which covers more than 1,000 European pension funds with assets of €400 billion (US$517 billion) found that 35 per cent of UK schemes, and 60 per cent of European schemes, expected to introduce new investment opportunities into their portfolio to help manage future investment risk.

European head of Mercer’s investment consulting business, Tom Geraghty, said funds were looking at ways to manage the risk inherent in their schemes, mainly through diversification of their assets.

Bonds continued to be the dominant asset class in most European countries however the survey found an increasing number of funds were diversifying into non-traditional investment opportunities. Allocations to alternatives increased from 10 to 11 per cent in Germany, 9 to 11 per cent in the Netherlands and from 4 to 6 per cent in the UK.

According to the report, in the UK schemes favour hedge funds, GTAA and active currency, and in the rest of Europe schemes favour hedge funds, commodities and high yield bonds.

In the UK and Ireland, where allocations to equities have traditionally been high, these allocations fell quite dramatically in the year, with the UK allocations falling from 58 to 54 per cent, and Ireland from 67 to 60 per cent.

Principal at Mercer, Crispin Lace, said turbulent markets had prompted broad and deep reviews of all aspects of pension scheme policy, and more than two thirds of survey respondents had undertaken investment related reviews or intended to in 2009.

Of those that had, close to 70 per cent had reviewed their counterparty exposure risk in 2008 and more than half reviewed their cash management. More than 70 per cent expect to review stock lending programs in 2009, and nearly half will analyse transaction costs.