GLOBAL - Economic conditions have resulted in the largest annual decline in global pension fund assets “for many years”, as the total value of pension pots fell 18% in 2008 to $25trn (€19.6trn), according to research from International Financial Services London (IFSL).

In its Pension Markets 2009 report, IFSL said pension fund returns in most countries turned negative over the year as most asset types fell in value, with an average return of -19% across OECD-member countries in the first 10 months of 2008.

The report stated exposure to equities had contributed to the negative returns in most countries, although it also highlighted the impact of “diversification into alternative asset classes that turned out to have much higher correlation to equities in a market sell-off than anticipated”.

It noted pension assets in jurisdictions that required large weightings in domestic government bonds were the best protected, although a decrease in estimated liabilities as a result of rising corporate bond yields also helped to offset the decline in assets.

Figures showed the value of global pension assets dropped from $30.4trn at the end of 2007 to $25trn at the end of 2008, the majority of which (64%) were held in the USA while the UK is the second-largest market with an 11% market share, Canada holds 5% of total assets and the Netherlands, Australia and Japan each hold 3%.

The IFSL research pointed out at the end of 2007 pension fund assets had exceeded 100% of national income in Denmark, the USA, the Netherlands, the UK, Australia, Canada and Switzerland.

Meanwhile, pension assets valued at between 50-110% of GDP had been accumulated in Finland, Chile, Sweden and Ireland by the end of 2007.

In 2008, however, the report showed all countries included in an analysis by the OECD had reported a negative rate of return in the first 10 months, with Ireland, the USA, Australia and Canada reporting the largest negative returns of between 20-20% each, while the smallest falls were recorded by Italy at -6%, although Spain and Germany both reported -7% returns.

The research also highlighted trends in asset allocation in recent years among five of the largest countries for managing pension assets - the USA, the UK, the Netherlands, Japan and Australia.

It noted the allocation to equities has dropped in the UK from 67% in 2003 to 56% in 2007, following a fall in the share of domestic equities in pension portfolios, while equity allocation remained stable in the USA, Australia and the Netherlands but increased from 44% to 51% in Japan over the same four-year period.

The IFSL said bond allocations “fell sharply” in Japan from 45% to 32%, primarily as a result of reduction sin domestic bond holdings, while the USA also saw a decrease in bonds from 34% to 30%.

In contrast, investment in bonds doubled in the UK over the period, from 15% to 30%, while schemes in the Netherlands also increased holdings from 40% to 43%, although investment by Australian schemes remained stable at 21%.

Figures showed the allocation of assets to cash, real estate and other investments varied between the five countries, with Australia holding around 25% in other investments, including 10% in both cash and real estate, while Japan has 12% in assets such as hedge funds, private equity and derivatives, compared to a 7% allocation to both cash and real estate in the UK.

The IFSL also said although returns on listed alternative funds fell as steeply as equities in 2008, there was “evidence of growing interest in alternative assets from European and Asian pension funds, as schemes sought diversification and gave more priority to absolute return and less on index risk. Gold proved to be the most successful diversifier”.

Other findings from the report showed the high equity allocation in these five countries is not reflected in other parts of the OECD, as in 10 countries, including Norway, Denmark, Poland and Spain, bonds accounted for more than 50% of the total assets at the end of 2007.

In addition, the IFSL stated that investments in equities makes up less than 10% of the total pension assets in seven countries, including Belgium, the Czech republic and Italy.

Elsewhere the research highlighted long-term deficits in occupational defined benefit schemes in a number of countries, and in 2007 the six French and six German companies listed in the Dow Jones STOXX 80 had the largest aggregate deficit of 4% and 2% of market capitalisation respectively.

Figures showed, however, that companies from the UK, the Netherlands and Switzerland, included in the index had an aggregate surplus of between -0.1% and 0.9% of market capitalisation, although IFSL admitted, “this masks a broad spread with some companies recording a deficit”.

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