GLOBAL - Last year’s financial downturn caused losses of over $5trn (€3.5trn) to pension funds worldwide, new figures from the Organisation for Economic Co-operation and Development (OECD) show today.

However, signs indicate the market is recovering, and pension fund asset volumes have already rebounded by $1.5trn between January and June this year following losses of $5.4trn last year.

The OECD’s Pension Fund In Focus report examined performance of funds in all member countries as well as some non-member countries, comparing pension fund performances in 2008 with the first half of this year.

Particularly of note are the returns for pension funds in Norway and Turkey, with the Scandinavian country seeing strong nominal returns of 10% for the year until June after losses almost as high in the previous six months, while Turkish funds enjoyed stable growth of around 10% in nominal terms for the entire year.

Ireland, where pension funds saw -35% returns last year, recovered somewhat and could report an estimated 5% return to June this year. Jean-Marc Salou, project manager for pension and insurance statistics at the OECD, and one of the report’s editors, believed investment strategy was responsible for Ireland’s strong decline last year.

“Looking at the data, it is mainly due to the demand of equities in the portfolio of Irish pension funds,” Salou argued. Irish funds restructured their asset allocation, with equities shrinking by 14 percentage points from 66% between 2007 and 2008. The Public Pension Reserve Fund system (PPRF) in Ireland also reduced its investments in equities by 13 percentage points to just under 60% last year.

Additionally, the OECD report also notes that reserve funds came under government pressure as they looked to them to soften the impact of the crisis, with the Irish National Pension Reserve Fund (NPRF), cited as an example after a quarter of its assets were used to prop up banks.

The report also notes that many countries benefited from having more invested in bonds, which saw lower returns but also suffered less from market volatility.

However, Salou was reluctant to completely disregard equities as a place for future investment. “Pension funds will probably continue to diversify their asset allocation and, in this respect, they should maintain this level of equity in their portfolios.”

Of the non-OECD countries examined in the report, Lithuania witnessed returns for pension funds of -19% last year but saw them recover to above 5% by July 2009, while  Ukraine maintained strong returns in 2008 despite the market upheaval and saw these returns increase to 21% so far this year. The OECD attributes this stability to high government bond exposure.

The report also highlights the slow recovery of defined benefit (DB) pension funds. It notes that while in most countries funding levels slowly began to strengthen over the first few months of 2009, the situation for DB funds continually worsened, with the deficit increasing from 9% to 13% by June 2009.

While the OECD’s report seems to indicate a slow but stable recovery from the market downturn, Salou was unsure where the figures leave defined benefit funds in the UK. “Nobody could at the moment say how long it would last or the speed by which the financial market will recover. It is difficult to read.”