EUROPEAN PENSION FUNDS FAIL TO BITE THE BULLET

Global Finance, Dec 2004 by Hawser, Anita

EUROPE

Europe's institutional investors should not be lulled into a false sense of security by the sizeable donations corporate pension plan sponsors made last year, says consultancy Greenwich Associates. Greenwich Associates' Chris McNickle commends European plan sponsors for acting responsibly following the crises of 2000 to 2002 but says conservative asset allocation means more than a third of continental European pension funds don't hold enough assets to fully fund estimated future benefit obligations. Aging workforces in these countries will also continue to increase liabilities. The findings form part of Greenwich Associates' 2004 research on continental European investment management, which analyzes trends in institutional funding ratios, asset mixes and investment strategies and contrasts it with data for the UK market.

According to McNickle, as plan sponsors on the continent are more dedicated to their final salary plans than other markets, European institutional investors need to keep on their toes, increasing investment returns in order to meet future obligations. Some investment managers have taken "radical" steps in terms of readjusting their asset allocations, but Greenwich's research indicates that many failed to follow through on previous promises, specifically in terms of increasing allocations to equities and alternative investments. "For three years in a row, plan sponsors and other institutional executives on the continent have been saying that they were going to make much more use of this high-alpha class of assets, but when it came time to put the chips down, many lost their nerve," says McNickle.

According to Greenwich, European government bond allocations declined to 25% of overall institutional assets at the end of 2003, compared with 27% the previous year. However, European allocations to private equity only amounted to 1% of total assets in 2003, and overall allocations to hedge funds remained flat at approximately 1%. Last year, institutions reported that they intended to increase equity allocations. Yet, McNickle says, this didn't happen for the most part as many sold off equities to balance prior losses. Despite a 30% increase in the performance of the world s stock markets last year, McNickle says the overall proportion of equities in a "typical continental institutions portfolio" increased only slightly, from 20% at the end of 2002 to 22% at the beginning of this year. -AH