Hard Hit European Funds Step Up Equity, Alt. Investments

September 29, 2003 (PLANSPONSOR.com) - With the trials of US defined benefit plans now well documented, a new study indicates some European pension funds may even be in worse shape.

According to a Greenwich Associates research report, 60% of the 282 European fund officials contacted said they are technically insolvent – a solvency ratio “substantially lower” than those in the UK or North America.

The continental European investment managers told Greenwich that they plan to respond to the solvency issue by:

  • beginning to increase equity allocations
  • stepping up their participation in alternative and international investments
  • reviewing their use of absolute return strategies for their portfolios.

Greenwich consultant Berndt Perl said the European funds were harder hit by the global equity weakness because declines in European stocks were more dramatic than elsewhere except Japan and that the European funds had reallocated out of fixed income and into equities during the late 1990s so they were harder hit when the stock “bubble” burst.

“Given that their equity allocations are roughly 20% of their assets, and that fixed-income rates are at or near historic lows,” Perl said in a statement, “it is difficult for a lot of plan sponsors to see how they will be able to cover their obligations to beneficiaries — except by obtaining large contributions from employers.”

The report said that the recent reduction in equity holdings as a proportion of total institutional assets is a virtually continent-wide phenomenon. For the coming year however, almost 50% more institutions expect to increase their allocations to European equities than expect to decrease them. Most funds expect to reduce their use of European government bonds, but many anticipate using more corporate and non-European bonds.

In order to bolster risk-controlled returns, many European institutions are planning to increase their participation in alternative investments. During the next three years, nearly 10 times as many European institutions expect to increase their use of hedge funds as decrease, and six times as many expect to use more private equity than expect to use less.

When it came to compensation, the average total cash compensation for the 282 institutional investment professionals in Continental Europe was €121,000 in 2002. Average salaries remained stable, while bonuses of most professionals fell slightly. Not surprisingly, median cash compensation levels differed by location. Compensation of investment professionals in the Nordic countries (€121,000) and Switzerland (€128,000) was higher than the continental Europe median of €114,000, while compensation levels fell below the median in Germany (€93,000), Italy (€108,000), and Spain (€78,000).