Pension funds move into alternative investments

Pension funds are increasingly investing in alternative assets such as real estate in order to reduce their liabilities, according to UK-based investment consultants Watson Wyatt.

Pension funds advised by Watson Wyatt gave out 61 mandates for alternative investment in 2005 - four times as many as in 2003, the company says. The most popular alternatives were absolute return mandates, real estate, high-alpha bonds and private equity companies.

Kevin Carter, European head of investment consulting at Watson Wyatt, said: “Generating returns to reduce deficits and implementing risk reduction strategies are now really the top priorities for the majority of pension funds."

As well as diversifying their portfolios to seek better returns, pension fund managers are also making more use of swaps - Watson Wyatt advised on 17 in 2005, up from five in 2004. Most are inflation or interest rate swaps, representing increasing use of derivatives for risk management by pension funds, Carter said.