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Worldwide, pension fund assets under management rose by 9% in 2005 to reach a new high of $18.6 trillion. The new edition of IFSL's Pension Reform report notes that assets were concentrated in a few developed economies, particularly the US, Japan and the UK. Assets managed by UK pension funds on behalf of domestic clients total $1,541bn.
The real return of UK pension funds was estimated at 7% in 2006. This built on strong real returns between 2003 and 2005 of 14%, 8% and 17%. Sterling's strength against the dollar and the yen in 2006 held back returns from investments in the US and Japan. Despite the earlier steep fall in equity markets between 2000 and 2002, UK pension fund real returns averaging 5.1% a year over the past decade have been above the 4.5% annual average recorded since 1963.
Key factors driving many more countries to review pension arrangements include growing deficits in occupational pension schemes, the increasing costs of financing state pensions, and ageing populations. Measures to be put in place in the UK include a new scheme to encourage private saving for retirement; reforms to the basic and second state pension; and raising the age of entitlement to the state pension.
Amongst the eight German companies listed in the Dow Jones European STOXX 50, pension fund deficits at end-2005 averaged 10% of market capitalisation, compared with 3% of market cap. for the 16 UK companies. The aggregate deficit for FTSE100 companies was £36bn at end-2005, only £1bn down on the previous year. The largest deficits as a percentage of market cap. were notched up by BA 53% and BAE Systems 43%.