GREENWICH, Conn. (HedgeWorld.com)–More than one-third of continental European pension funds are struggling to meet future benefit obligations, according to Greenwich Associates, a U.S.-based market research and consulting firm.

The remedy for pension officers’ impending headaches seems to be found in alternative investments to which a growing number of European pension funds are adding such allocations.

Generally, these funds are shifting their bond and cash allocations to other strategies such as hedge funds to gain the alpha they need to meet their pension benefit obligations in the years to come. Greenwich officials estimate that funds on average are targeting an annual rate of return of 7.9% over the next five years.

Such a return lags the expectations for equity markets, said Chris McNickle, consultant with Greenwich, in a statement. Equities still account for the majority of pension fund portfolios, while the combined government bond and cash holdings total roughly 30% or 500 billion euro (US$654 million).

A shift of 3% out of bonds and cash to other investment areas on the fringes such as international equities, corporate and emerging market bonds and alternative investments would total 50 billion euro, officials estimate.

But so far hedge fund allocations have been more in talk than action. In 2003, hedge fund allocations were almost flat at 1%. By 2006, though, pension executive are expected to follow through on their promises. According to Greenwich’s research, most continental European pension funds expect greater allocations to hedge funds in the next couple years.

In the next 12 months, 23% of the plans interviewed by Greenwich said they would hire a hedge fund manager. That falls in line with figures for plan sponsors in the United Kingdom.

Of 94 U.K. pension funds surveyed earlier this year by Pioneer Alternative Investments, almost half reported investing in or having interest in allocating to hedge funds (see ).

Mr. McNickle believes that European institutions should not be “lulled” into a false sense of security after taking precautions to stabilize their asset allocations.

“While commitment to their final salary plans is commendable, they should note that in the U.K. similar conditions have resulted in the closing of half of all defined benefit plans to new employees,” said Mr. McNickle in a statement.

Contact Bob Keane with questions or comments at: bkeane@investmentadvisor.com.