GLOBAL - A slow recovery is predicted for global pension funds despite a recovery in the markets, a new study said.
Pension fund balance sheets, that have plunged into deficit by shrinking assets and soaring liabilities, will take many years to repair, according to a new report by Watson Wyatt’s entitled ‘Global Investment Review 2004’.
Corporate pension funds around the world are facing contribution shocks as the shortfalls in funding levels will require them to inject significant cash for at least five years, in order to attain a fully funded position, the report said.
“The global pension fund balance sheet had lost 40% of its value between 1999 and 2002 and now estimates an average global funding level of 80%, on a market value basis.
“This takes into consideration a 6% rebound, driven in part by the recent stock market recovery, but points to considerable ongoing strain for corporate cash flows for at least the next five years,” said Watson Wyatt.
Roger Urwin, global head of the investment practice at Watson Wyatt, said: “Companies and trustees clearly have some difficult decisions to make in terms of adjusting the risk profile of their pension fund, largely determined by their weighting in equities, to best address not only their liabilities but also their funding shortfall.”
The report said that UK pension funds are running the highest value at risk measure of all the major pension markets at an average of 20 % as compared to 19% in the US and Netherlands, 16% in Switzerland while Japanese and Canadian funds are running a risk of 11% and Australian funds 10%.
Urwin said: “Given the state of pension fund balance sheets around the world, there has never been a more important time to maximise returns where possible, which is probably why long-term absolute return mandates are proving popular with pension funds.
“Another attractive element of this approach is that it should foster a longer and more fruitful relationship between investment managers and pension funds.”
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