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European schemes 'need up to 10% asset growth'

EUROPE - A new report from J P Morgan claims European corporate pension schemes will need to grow their assets by up to 10% a year - assuming no extra contributions are made - to maintain their funding level.

“Assuming no contributions are made, we found that a typical plan will need to produce 5-10% asset growth per annum in order for their funding level not to deteriorate further,” J P Morgan said. It added: “If rates remain unchanged even 10% asset growth would barely make a dent in funded status.”

The report also states that contributions and market outperformance, or alpha, will become “increasingly necessary”.

The comments come in the firm's 20-page 'Overview of European Corporate Pension Plans - assessing the funded status of the largest corporate pension plans'. It was compiled by Gabriella Barschdorff, vice president in J P Morgan Fleming's strategic investment advisory group. Barschdorff reviewed data from the 2003 annual reports of 71 of the largest European corporate pension plans - ranging from ABB to Vivendi. Schemes surveyed ranged from €30m to €40bn.

The report found that the average plan is still only 74% funded on a projected benefit obligation basis - down from 95% in 1999. Total contributions in the period were €18.5bn, down from 2002's €21.4bn. But compared to the size of the scheme, average plan contributions fell to 4% of the liability, from 5% in 2002.

Among the firms making large contributions were DaimlerChrysler (€2bn) and Aventis and Siemens (€1.8bn each).

J P Morgan estimates that liabilities rose by around 5% “just due to the interest rate effect”. It said: “Given the difficulty of finding assets that even partially keep up with the steady, normal growth of liabilities, we are forced to question why more plans did not embrace asset/liability and duration management strategies to offset these volatile, market-driven changes in liability values.”

“There are certainly challenges ahead as European pension funds strive to retain lost ground, “said Peter Schwicht, head of European institutional business. “We believe that the most successful plans will make a concerted effort to understand the challenge, with strategic planning that includes funding goals and asset growth needs.

"Successful pension plans will also need to assess their risk tolerance and the availability of contributions, as well as their asset liability duration matching and the matching of their portfolios in terms of sources of return and their efficient use of capital."

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