EUROPE - Pension funds are facing a two-way hit as the current market correction co-incides with a fall in bond yields. But this is only a short-term problem, say pension funds.

Mike Taylor, chief executive of the £3.5bn (€5bn) London Pension Funds Authority (LPFA), noted that along with the fall in equity values, the LPFA was also watching the current drop in bond yields as this increases the fund's liabilities.

Yesterday, UK pension funds saw highest single-day deficit increase since the introduction of FRS17 in 2001, according to figures released by Aon Consulting, due to the twin effect of equity prices and bond yields. "Pension schemes have seen their liabilities rise by £5bn on the same day their assets fell by £6bn," commented Marcus Hurd, senior consultant at Aon.

Taylor added that it was far too early to assess the impact of the current drop in equities on pension fund returns. "We are long-term investors taking a view over 20 years or more," Taylor said.

Other funds said they are keeping an eye on the markets. Jussi Laitinen, chief investment officer at the €21.6bn Finish multi-employer fund Ilmarinen, said the developments were "of course not extremely pleasant".

But he added: "Drops like this are not hurting too badly yet for an unleveraged investor. Of course if these last days of unrest mean a massive de-risking event we might be in for a longer period of unease which would hurt a lot more."

A managing director of a €1.2bn German Pensionskasse told IPE that the market dip was expected. "Everyone expected the market dip to come so it's not really a surprise. The signs have been there for weeks. Chinese and Japanese currencies have been appreciating for some time and the fact that the US economy is slowing has been known for at least a half year."

Laitinen agreed that "equity markets have done extremely well over the last eight months so it was inevitable that something would trigger a profit taking".

The €209bn Dutch pension fund ABP told IPE that it is closely monitoring changes in the market, although it would not comment on short-term market movements.

However, analysts agree that the market correction, triggered by changes in the Chinese market as well as indicators from the US for an economic slowdown, is only temporary. 

Gigi Chan, Ear East & Asian equity fund manager at Threadneedle, explained that the 9% fall in the Shanghai Composite Index is "a healthy correction after a very strong run of performance".

He stressed that in the long-term China remained a market to be invested in. "Structurally, the quality of the market is improving all the time. There is greater transparency and corporate governance is now much stronger," he said.

Taylor said the knock-on effects on the global economy were of concern to the LPFA. The fund has some exposure to emerging markets including China through its global equities portfolio.

The German managing director, however, doubted any continued major effect on German equities: "I do not think the Dax will fall back that much. If you consider their profitability, German companies are still not overvalued right now. I see the Dax settling at around 6,500 points. 7,000 is a bit of an overshoot."