Pension funds mix it up to tackle longevity

Thu Mar 25, 2010 2:32am EDT
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By Cecilia Valente - Analysis

LONDON (Reuters) - On top of the shock of the worst market crisis in generations, western European pension funds are wrestling with the fundamental test posed by the highest levels of life expectancy in history.

If they are to provide for a post-retirement population which, on current projections, could make up nearly one-third of the total by 2050, one thing is clear: shunning risk is not an option.

So the maxim remains: mix it up, cherry-pick. Risk appetites differ but funds remain invested in equity, and some are increasing this exposure.

Fund managers are hunting for assets whose performance may not synch with broader markets, which can offer a hedge against inflation, or which -- with the right timing -- can lock in for Europe's future retirees a share of the wealth being generated by emerging markets.

And though they worry about sovereign debt, the need to pay out keeps them exposed to government bonds.

"The challenge is key-risk management and true diversification," said Lars Rohde CEO of Denmark's labor market fund ATP with assets of 609 billion Danish crowns ($111.8 billion).

"There is no trick, no easy way. A lot of 'truths' traditionally taken for granted ... have come to be challenged."

The market nadir in the wake of Lehman Brothers' collapse came in March 2009, when the MSCI world equity index was down 51 percent. It has now almost regained that lost ground, and the Citigroup government bonds index is now above pre-Lehman levels.   Continued...