Greenwich Associates’ 2007 Continental European Investment Management Study, released on Monday, reveals that improvements in pension funding levels are giving plan sponsors in continental Europe the opportunity to experiment with new strategies designed to reduce the risk profiles of their portfolios and more closely link assets with liabilities.
The study finds that the average ratio of assets to liabilities ('funding ratio') of pension plans in continental Europe increased to 118% in 2007, and the proportion of pensions considered seriously under-funded has dropped to a multi-year low. As recently as 2003, continental European pension funds held assets representing just 93% of their liabilities, and last year pension funds reported average funding ratios of 115%, according to the firm.
"Pension funds on average now have adequate assets in place to meet their obligations and liabilities," says Chris McNickle, consultant, Greenwich Associates. "Many plan sponsors are looking to take advantage of this situation to reduce their risk profile and lock in the current position," he adds.
According to the study, the easiest way of achieving these ends is through a shift of asset allocations to fixed income and away from equities and other asset classes with higher levels of volatility and risk. The results of this type of shift can be dramatic.
Greenwich Associates found that more than 30% of continental institutions are now using some form of asset-liability matching strategy in their investment portfolios, and 15% of institutions report using liability-driven investment approaches. In addition, 28% of institutions are using absolute return strategies for a portion of their assets and more than 20% have implemented hedging overlay strategies to actively manage specific risks such as currency exposure.
"The portfolio-wide strategies used by a growing number of Europe's institutions introduce a more holistic approach to portfolio management, emphasising the risk profiles of various investment instruments, and how they fit — or do not fit — with a fund's liability stream," says Chris McNickle, consultant, Greenwich Associates.