Almost a third of pension funds (30%) reallocated more than 5% of their investment portfolio during 2006 in pursuit of more diverse and risk-controlled investment strategies, according to research released today by Aon Consulting.

However, increased volatility in markets over 2006 and the continued focus on bond yields has meant that the focus for many scheme-sponsoring employers has been on how assets relate to scheme liabilities.

According to the research, 14% of pension funds have invested to diversify their growth assets over the past year, with the intention of being less exposed to a single volatile asset class. This builds on investments by funds into such assets made in earlier years.

The greatest shift in 2006 was the continued return to favour of the property sector with 50% of schemes diversifying growth assets using property. However, absolute return vehicles such as hedge funds (17%) and global tactical asset allocation (11%) are also becoming popular forms of growth investments.

Paul McGlone, principal and senior actuary at Aon Consulting, said: "The improved investment returns achieved by most schemes in recent years is going some way to alleviating the rising deficit levels experienced by almost all pension funds during the last decade.

"However, while most trustees and employers still believe that equity returns should outperform other asset classes over the long term, many find themselves in a shorter-term game. Interest in wider asset classes has accelerated and is expected to build on this over the next 12 months."

More than a tenth (11%) of employers indicated that their schemes have adopted some form of Liability Driven Investment (LDI) strategy in the past 12 months, to enable their scheme to better match movements in assets and liabilities.

The change expected to have the biggest potential impact in 2007 is the increased use of contingent assets for scheme funding. A sixth (17%) of schemes in the survey are already using such assets in their portfolios, with another 20% considering such assets.

Parent companies and/or group guarantees are the most popular form of contingent funding being implemented (17%) or considered (20%), with escrow accounts (1%/ 19%), charge over assets (2%/ 14%) and letters of credit (2%/12%) being the next most popular considerations.

McGlone continued: "The implementation of LDI strategies remains somewhat limited, with a key factor being the perceived cost of such a strategy. In the meantime, the use of contingent assets is growing quickly.

"While such assets do not generally remove risk from the employer, they can help to manage the volatility, and should make trustees more relaxed about any short-term investment underperformance. They can also free capital to be invested directly in the business rather than the pension fund, which will hopefully pave the way for a more integrated approach to funding and investment across the busi-ness, to the benefit of all stakeholders."