Pension funds have lost over £50bn from their weightings in UK equities since the start of 2001 due to falls in the stock market.
Both the FTSE 100 and the All Share index have fallen by 14% since the beginning of the year - over which time pension funds have held an average weighting of 48.3% in UK equities, according to performance measurement firm WM Company.
With similar falls in both US and European equity markets, total losses in equities for pension funds in the first quarter are expected to be significantly higher.
The market could fall by a further 9% to £300bn as the worse case scenario over the next three to six month period, but is unlikely to rise to the figure at the close of 2000 with a potential rise of 15% to £380bn, according to Dresdner RCM head of research Ian Vose.
The current benchmarks - partly driven by constraints imposed by the minimum funding requirement - is a shift out of equities and into bonds as pension funds adhere to their funding liabilities and scheme maturity.
Dresdner RCM head of research Ian Vose said that while these headline figures may unease trustees, most pension funds likely to weather the storm and take a long term view. “Pension funds have had very strong positive returns over the last 10 years and now the gloss is starting to come off slightly. While the short term pain we are experiencing is far from ideal, but if you place it within the 20 to 30 year context and the fact that this is a strategic deployment it is not likely to drive trustees away from equities.”
Fund managers argue that the consequence is the reverse - the combination of a short term fall in UK equities and an increase bond exposure - could potentially increase the appetite for UK equities because the long term value ratio between equities and bonds is such that equities are incrementally attractive relative to bonds.
“I would say the strategic response would be to look to buying equities and selling a few bonds”, Vose added.
Whatever the movements in pension funds assets in equities over the next three to six months are, the cause will be owed to market fluctuations rather than major asset allocation changes at least for as long as trustees are governed by minimum funding requirement obligations.
Baring, Houston & Saunders director of UK equity Richard Buxton said pension funds do not react to short term movements in the market. “Most experienced trustees understand the long term benefits of investing long term monies in equity. They do not just react to a stock market decline over the last 12 months and say ‘I must take money out of equities and hide it under the mattress’.”
Buxton said the move away from equities into more fixed income could also be accounted for by pension funds increasing maturity and changing liability profiles.
Aegon Asset Management head of UK equities Steven Laidlaw said the market is very nervous at the moment but with global interest rates falling it is a very good environment for equities to perform well. “It has been a bad time for equities over the last nine months and trustees will be hurting but in the longer term we remain positive. Over the next three to six months we expect the cheapness of equities coupled with falling global interest rates to improve.”
Dresdner RCM head of UK/Euro equities Neil Dwane said the £50bn headline loss has to be put in perspective.
“If you look back three or four years ago the total assets held by pension funds in UK equities is probably something like £150bn compared with near £400bn at the beginning of this year - so it should be taken into account how well out of UK equities pension funds have done already to get to this point.”
Dwane warned the more the view crystallises that the market will not recover in the second half of this year
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