UK - Strong performance from UK pension funds in 2004 must be viewed in the context of an equity bear market recovery, the WM Company has warned.
State Street Corporation’s European performance measurement arm said strong equity performance in the UK and continental Europe (ex-UK), which led to a solid return of more than 11%, should be put in perspective.
“Although 2004 was a second consecutive year of steady growth, pension funds are still suffering the effects of the sever equity bear market between 2000 and 2002,” said Michael Walsh, managing director of WM.
“Full recovery will require more years of similar or better overall investment returns, higher employer contributions or a significant increase in bond yields.”
For the year, UK equity returns reached nearly 13%, while overseas equities in aggregate rose more than 10% in sterling terms. According to WM, Europe ex-UK equities returned more than 13% and Pacific ex-Japan equities 16%, while Japanese equity performance recovered towards the end of the year to finish at 7%.
Walsh said the diversification benefits of property, which is the top performing asset class over one, three, five and 10 years but only has exposure of about 7%, have been largely missed.
“Property remains a largely unexploited asset class, and funds looking at alternative investment opportunities such as hedge funds should bear these figures in mind,” he said.
In terms of asset allocation, WM said pension funds continued to shift from UK equities towards bonds and overseas equities with those surveyed withdrawing some £10.6bn from the UK equity market over the year.
“FRS 17 accounting regulations and the closure of many defined benefit schemes to new members have brought the mismatch between assets and liabilities into sharp focus for many commentators,” Walsh said.
“Although the pace of change may be increasing, last year’s asset shift from equities to bonds is very much in line with long-term trends. Over the last ten years, funds represented in the survey have released over £65bn from UK equities, while bonds and overseas equities have had inflows of £48bn and £30bn, respectively.”
WM’s annual pension fund survey takes in more than two-thirds of the UK pension market.
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