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Over half of European DB pension schemes will alter risk appetite, says survey

Over half of all European defined benefit (DB) pension schemes (58 per cent) plan to change their risk profile over the next three years to address funding challenges, according to a survey commissioned by State Street and conducted by the Economist Intelligence Unit.

The survey found that 60 per cent of DB schemes will increase their allocation to alternative investments over the next three years.  This result is in contrast to their actions over the previous three years, during which time only 28 per cent increased their exposure to alternatives.

With some appetite to take greater risk, 60 per cent are saying they will increase their exposure to emerging markets, versus 35 per cent having done so over the last three years.

Niall O’Leary, head of EMEA portfolio strategy for State Street Global Advisors, told a roundtable debate staged by Clear Path Analysis that the conflict between long-term investment and short-term volatility is ever present for investment managers and unlikely to change, but has led to a greater willingness on the part of clients to look at strategies such as managed futures and managed volatility.

“Investors are becoming more conscious of the need to diversify to avoid tail risks and are creating individual solutions to address this need,” he said. “We are seeing a growth in demand for strategies such as managed futures, or trend-following strategies, which provide the opportunity for significant positive returns in dislocated markets, but also offer the possibility of modest returns in more normal market conditions.”

During the same Clear Path discussion, Peter Griffin, director, Allied Pension Trustees, said: “Most scheme sponsors are ultimately looking to manage volatility. For us this would be met by a mixture of asset classes including corporate bonds, hedged global equity funds and absolute return strategies.

“Portfolio diversification may well reduce your exposure to immediate dips in financial markets, however it is important not to diversify your return potential away. It goes back to the core question of what the scheme sponsors’ (or employers’) objectives are. When real assets are offering a significant risk premium this will often mean that the so called risk-free assets can be quite expensive.”

The State Street 2012 European pension study was conducted by the Economist Intelligence Unit during October 2012. 150 responses were received from defined benefit and defined contribution pension schemes in Germany, Italy, Netherlands, Switzerland, UK and the Nordics. The roundtables took place between October and December 2012 and were published in the report Focus on the Future: Designing Tomorrow’s Pension Plan, which was authored by Clear Path Analysis and commissioned by State Street.

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