Pensions: European plans often falling short.

• Author: Marshall, Jeffrey
• Position: Pension funds

Domestic U.S. pension funds have had their share of problems. New research finds that more than a third of continental European pension funds do not hold enough assets to fully fund estimated future benefit obligations--despite the market recovery of 2003 and the fact that many corporate plan sponsors made hefty contributions to their plans last year.

"Continental plan sponsors deserve to be complimented for the responsible steps they have taken to stabilize their situation after the market debacles of 2000 to 2002," says Chris McNickle, a consultant with the survey authors, Greenwich Associates. "But Europe's institutional investors should not be lulled into a false sense of security--they have very conservative asset allocations and aging workforces that will continue to increase liabilities."

Persistent solvency concerns, and the fact that plan sponsors on the Continent are much more dedicated to their final salary plans than are their counterparts in other markets, suggest that European institutional investors will need to increase investment returns in order to keep up with their future obligations, Greenwich concluded. Recognizing this need, many institutions have taken steps with regard to asset allocations and investment managers that would have seemed radical just a few years ago. However, the research reveals that many institutions have failed to follow through with aggressive plans from past years, especially with regard to increasing allocations to equities and alternative asset classes.

Perhaps the clearest sign that continental Europe's institutional investors are committed to taking decisive steps to improve performance in final salary plans is the year-to-year decline in government bond allocations. European government bonds shrunk to 25...