European pension funds have had a good run over the last three years. Their string of positive annual returns culminated in double-digit average returns last year in most countries, according to analysis from Koen De Ryck, chairman and managing director of Pragma Consulting in Belgium.

Strong equities performance has been the main factor behind the overall investment returns, with the asset class helped along in particular by Japanese and emerging markets shares, De Ryck showed in his presentation on the 2005 performance of pension funds in Europe to the Belgian Association of Pensions Institutions (ABIP).

It was pension funds in Iceland that came out at the top of the European investment performance league table last year, according to data collated by De Ryck from consultancies, publications and national industry associations.

Average returns for Icelandic pension funds were 21.6% in local currency. In second place, UK funds achieved returns of 18.7% on the same basis, followed by Finnish pension funds with an average of 17.0%.

Commenting specifically on Belgian pension funds, De Ryck said that in 2005, the return achieved by the funds had nearly doubled compared with the previous year, rising to 14.96% from 8.93% in 2004.

At the end of last year, Belgian pension funds had slightly heavier weightings in equities than they did in bonds. Their average asset allocation was 41.6% fixed income, 44.2% equities, 7.5% real estate, and 5% cash. Within equities, Euro-zone equities were heaviest, accounting for 24% of overall asset allocation, with other European stocks adding up to 5.7% and US/Canadian stocks at 9.59%.

The double-digit return seen last year helped the Belgian pension funds recoup the losses they suffered in the first two years of the century. In 2001, they lost 5.12%, and this deepened to 11.92% the following year.

Last year’s excellent returns, he said, were mainly down to the funds’ investments in equities - which gave a return of 27.9%- and their real estate investments, which were up 22.9%. Among equities, emerging markets and Japanese equities came out on top, with returns of 49.1% and 44.2% respectively.

Poorest performers were North American equities and bonds, with each class returning 5.2% over the year.

Citing data from the ABIP, De Ryck showed that there had been some small shifts in the average composition of Belgian pension funds between 2004 and 2005. Fixed income weightings had risen by 1.7% while cash holdings dropped by 2.9%. Equities were a marginal 0.5% higher, and real estate weightings were up by 0.3%.

Looking at median returns for Belgian pension funds, the figure had fallen significantly when seen over the last five years compared with the figure seen over the last ten years. The five-year median return was 2.26% against 7.90% for the past ten years.

Moving on to pension funds in the Netherlands, De Ryck pointed out that here, too, 2005 was the third consecutive years of positive returns. The average return in 2005 was 14.3%, including giant fund ABP and PGGM, up from 9.9% in 2004, and 10.7% in 2003.

These returns were boosted in 2005 by equities, which returned 31.2%, private equity, with 32.6% and commodities which yielded 28.7%. As with Belgian pension funds, the top equity performers for Dutch pension funds were Japan and emerging markets.

In the Netherlands, pension funds tended to be weighted more heavily towards bonds than were their Belgian counterparts.

Average asset allocation for Dutch pension funds included a 46% fixed-income weighting, against a 38% stocks weighting. Real estate accounted for 10%, followed by cash/other at 3% and hedge funds, private equity and commodities with 1% each.

Of stocks, Europe accounted for 17% of overall asset allocation with North America taking up an 11% slice.

Five-year returns for Dutch pension funds, in the most recent period, varied from an annualized fall of 1.2% to a rise of 9.6%, with most of this due to the bad performance in 2001-2002, he said. The average five-year return was an annualised 4.5%.

“Despite the rise in equity values, the asset mix of pension funds did not change significantly in 2005,” De Ryck said. The majority of assets remain invested in fixed income, with equities the second largest asset class. But there had been a small move towards alternative asset classes, he noted.

The ravages of declining market values seen at the start of the century, funding ratios at major Dutch pension funds were well above 100, he said.

The higher returns witnessed more recently had helped to increase the average funding ratio of the industry-wide schemes to 128%, when measured using the fixed 4% rate.

However, if the market rate was used to calculate funding levels, coverage did come out as lower, he pointed out.

Pension funds with the highest funding ratios were ICK (IT & Communications) with a ratio of 360%, Apotheken Pensioenfonds with 177% and Spoorweg with 172%. Only three schemes had a funding ratio that was less than 110%.


rom 2007 onwards, the new FTK financial assessment framework would be in place in the Netherlands, under which pension funds are obliged to calculate their funding ratios according to the market rates, said De Ryck.

Meanwhile, in the UK in 2005, pension funds continued cutting their exposure to UK equities, with weightings falling to their lowest level since the mid 1970s - down to 35.7% from 48.3% in 2000. Overseas equity weightings rose to 28.8% from 22.7% over the same period.

Overall, UK pension funds’ exposure to stock markets fell to 64.5% from 71%, while exposure to bond, index-linked gilts and alternatives - hedge funds, private equity and venture capital - all rose. Their allocations to property, on the other hand, had decreased over the last five years, said De Ryck.

Last year, UK pension funds saw their greatest weighted average return since 1999, at 18.7%. “Smaller pension funds outperformed larger ones over the year,” he said, with the median return for smaller funds at 19.2%. “The strong performance in 2005 (for UK pension funds) was mainly driven by double-digit returns of the major equity markets,” he said.

Locating the main sources of returns for pension funds in the three countries in 2005, De Ryck cited equities as one of the main asset classes that increased overall returns. Equities performed much better than bonds, he said.

Within equity, Japanese shares rose due to that country’s strong economic expansion, and emerging markets outperformed developed markets. Many European equity markets provided investors with double-digit returns.

“The US lagged, but thanks to the appreciating dollar, the returns on US stocks in Euro were higher,” he said. Small and mid-cap stocks outperformed large caps again. “Global large-cap value stocks outperformed growth, but the gap is decreasing,” he said.

Listed real estate also helped to boost overall returns, producing returns which were comparable to those of global equities. Private equity and commodities also increased returns for pension funds.It was largely bonds and currencies that dented overall returns last year, said De Ryck. In Europe, government bonds outperformed corporate bonds. On the foreign exchange front, the US dollar was up against the Euro, and a number of emerging market currencies were also higher.

Looking ahead, there were several questions now facing European pension funds, he said. Would positive returns be as good in 2006 as they were before, and which asset classes would contribute to higher alpha?

It remained to be seen whether the rally in emerging markets was capable of continuing. “Will the increased allocation to alternative asset classes help to achieve better returns?” he asked, adding what did the future hold in terms of geopolitical uncertainties, the price of oil and that of other commodities?