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 be synchronized 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.
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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 labour 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 per cent. It has now almost regained that lost ground, and the Citigroup government bonds index is now above pre-Lehman levels.
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Heavy losses suffered in the thick of the crisis are also encouraging investment strategies aimed at being able to match liabilities when these arise, as funds budget for members claiming for longer than previously expected.
Life expectancy at age 65 in Europe ranges from about 14 to nearly 22 years, according to Eurostat: an increase of up to three years since 1990.
While UK funds are insuring part of their pensioners' liabilities with specialists, continental European schemes are adding billions to their current liabilities to prepare for the long-term effect of longevity improvements.
Britain, the Netherlands and Switzerland are the major markets where pensions are mainly funded by a pool of investments, rather than being levies on current workers.
Together with funds based in France, Germany and Ireland, they hold the strings to an aggregate $4-trillion purse, according to a study by consultant Towers Watson. That excludes Scandinavia, which also has large and sophisticated pension and buffer funds.
In terms of equity, most are shifting part of their investments into emerging markets to tap into growing economies - making these countries a target of diversification. This shift, while limited in size, makes future pension payments in the West partially dependent on Eastern and emerging economies.
Reaching out for Timber
Denmark's ATP is "reaching out for" infrastructure, timberland and private equity to expand its investment horizons, Mr. Rohde said.
RAFP, the €8.2-billion ($10.9-billion U.S.) pension fund for French civil servants, is currently boosting its exposure to equity from the current 15 per cent to the maximum target of 25 per cent of its flows, said its director Philippe Desfosses.
And ABP, the largest pension fund in Europe covering the Dutch civil service and public employees, signalled earlier this year a change in its strategic portfolio to provide "a better picture of the trend over time of the real liabilities".
Under the new strategy the fund, which has over €200-billion in assets, will cut its exposure to developed markets' equity to increase exposure to emerging markets, commodities, infrastructure and real estate as well as inflation-linked bonds.
Assets which can hold value in an inflationary environment - including derivatives - are also in pension schemes' sights. Demand for alternative asset classes that may offer a return no matter what is a clear trend, said the Towers Watson report.
ABP has already pushed the boundaries there, investing €500-million in music rights.
Schemes sponsored by food group Nestle have been busy implementing new strategies to contain the damage caused by bear-runs in the markets, according to Jean-Pierre Steiner, the executive responsible for Nestle pension assets globally, over 25 billion Swiss francs ($23.63-billion).
"We have some tactical bets in favour of emerging equities that we actually think of reversing because it (the rally) may be over now for the shorter term," he said.
In that contrarian vein, some Nestle schemes have recently looked at convertible bonds, but Mr. Steiner has drawn the line at microfinance.
"Our conclusion was it was not worth it at this point in time," Mr. Steiner said.
He is also not persuaded that alternative asset classes such as music rights can prove resilient to market tides.
"We sometimes talk about going into art collections and/or wine but it has not yet gone beyond a joke. I do not think it is a bad idea though, but the mere idea is not easy to sell to trustees or investment committees," he said.
"In a crisis, inter-asset-class correlations go up and you do not have much diversification left. It is difficult to anticipate but it is logical: when people sell at any cost everything they can, this creates distortions," he said.
"I am not sure there is much we can do beyond going into very, very different asset classes. But can you really put a lot of money in such new asset classes? Probably not, they would likely remain marginal."
Seen It All Before
However innovative pension funds aim to be, they cannot lose sight of their long-term liabilities and the ensuing dependence on long-term sovereign bonds to meet these, at least in part. Some, looking at the debt burdens of both the United States and Europe, are nervous.
"The amount of public debt and other structural imbalances are a genuine concern in many countries including the U.S.," said Eric Valtonen, chief investment officer at Swedish third buffer fund AP3.
These worries have been highlighted by Greece's spiralling public debt and its struggles to regain financial discipline. But pension funds point out that when it comes to meeting retirees' cash needs, they don't have a great deal of choice.
"There is no alternative in a global perspective," said ATP's Mr. Rohde. "Nobody is twisting our arms (to buy sovereign bonds) but it has always been the case."
He noted that in the 1960s to 1980s, high inflation in Denmark had government bonds there yielding about 20 per cent.
"So we've seen all this before. We have seen high-yield countries becoming low-yield and vice versa. There's no real news here."
ATP currently has no exposure to Greek sovereign debt because the country is a "non-core" investment zone, together with others in southern Europe, he said. But potential high yields on offer could be a draw.
"Of course the present level of interest rates for non-core countries is making them interesting things to go into," Mr. Rohde said.