Despite volatility in world investment markets,
UK executives responsible for final salary pension schemes still
favour a significant exposure to return-seeking assets, consultancy
Watson Wyatt has concluded following a recent investment seminar it
hosted. Equities, property, hedge funds and private equity all
featured high on the investment asset choices of company executives
at the seminar, who in total oversee pension assets of more than
£70 billion ($140 billion).
Watson Wyatt noted that more than four in five of
the companies represented at its seminar said the ideal proportion
of return-seeking assets in their pension schemes was more than 40
percent, given their current funding position. Although most of
them expressed a desire to reduce this allocation if the scheme’s
funding position improves, nearly one-third said they would
continue to seek higher returns in any event.
“It is possible that the experience of the last six months, which
have seen deficits sharply reduce, has given corporate sponsors
renewed enthusiasm for investing in equities and other
return-seeking assets,” said Graham Mitchell, a senior corporate
consultant at Watson Wyatt. He added that companies are also
recognising that if pension scheme assets are matched more closely
to liabilities, investment returns are likely to suffer.
“While companies remain aware of the risk that investment markets
may move against them – either through a fall in the equity market
or a rise in bond prices – the risk that concerns them most is that
mortality will improve,” said Mitchell. Notably, nearly one-half
the executives attending the seminar said improving mortality was
the major risk faced by their pension scheme.
By comparison, one-quarter of the executives said they felt the
biggest risk to their schemes was a fall in equity prices and
one-quarter said a fall in bond prices was the biggest risk.
Underperformance by a fund manager was seen as a minor risk.
“Unexpected improvements in mortality are of greatest concern to
executives; while the longevity insurance market in its infancy,
companies know that to protect themselves against this risk they
are likely to have to pay the full price of an insurance company
He added that the buyout option includes the effect not only of
revised asset allocation and insurance company profit margins, but
carries with it the need to meet the higher solvency requirements
of insurance companies. This suggests that there is significant
demand for longevity insurance if suitable products can be devised,