28 January 2008

IPE: Schemes warned of deficit risk from markets

Falling equity markets combined with lower bond yields and increasing longevity could push schemes back into deficit in 2008, the International Financial Services London has warned.

In it's Pensions Market Report 2008, the IFSL revealed global pension assets increased to $26trn (€17.6trn) at the end of 2006, of which two-thirds, or $17.5trn, are invested in occupational pension schemes.

Findings from the report highlighted trends in asset allocation over the 10 years from 1996 to 2006 in five major asset-managing countries, including the UK and the Netherlands, and concluded stock market volatility is less influential on long-term investment trends.

That said, the research revealed real rates of return of UK pension funds fell in 2007 to 3%, down from 7% in 2006, and it warned while FTSE100 schemes, for example, are currently in surplus, falling equity markets, lower long-term bond yields and longer life expectancy could all push funds back into deficit during 2008.

It also pointed out that it is not just the UK at risk, as other European countries, based on companies in the Dow Jones STOXX 80 - such as Spain and Germany - have some of the largest aggregate scheme deficits,  valued at 11% and 5% of market capitalisation respectively.

In addition, the research findings revealed an increase in the international equities' share of pension funds' portfolio saw allocation to equities increase over the 10-year period, in all countries except the UK which saw its allocation fall from 75%to 64% as exposure to domestic equities was reduced.

But while allocation to bonds fell in the Netherlands, and the other three countries – Australia, US and Japan – during the same period following a reduction in domestic bonds investment, the bonds share in the UK increased from 14% to 24%, which the IFSL attributes to a growth in the issue of government bonds.

The report also noted the share of assets invested in cash has tended to fall slightly across all countries, while it claimed there is no consistent trend in real estate, albeit alternative investments such as hedge funds, private equity and derivatives, have become more popular.

Further findings from the report highlighted the growth of public pension and sovereign wealth funds - which it revealed had assets estimated at $5.6trn to the end of 2006 - with countries in the Organisation for Economic Co-operation and Development (OECD) such as Norway and Sweden accounting for $4trn of assets, which have been specifically put aside for future pay-as-you-go pension liabilities.

The IFSL also outlined the international responses to demographic trends, the costs of state pension systems and the deficits in occupational schemes, and recommended seven "key elements" to help governments develop an appropriate risk framework for pension schemes.

© IPE International Publishers Ltd.