EUROPE - Recent funding decisions by some pension funds are sending confusing messages about pensions funding needs when compared with moves to maintain pensions assets in turbulent investment markets, suggest European asset managers and pensions consultants.
Hewitt Associates today noted UK pension funds have seen major losses through yesterday's global stock market falls, and put them "right back where they started in 2007". The 5.3% fall in the FTSE All-Share index combined with drops in other global markets saw the surplus on the FTSE100 pension schemes swing from £9.4bn (€12.65bn) on Monday 21 January to a deficit of £4.6bn yesterday - a swing of £14bn and a shift from 102.8% funded on Monday to being just 98.6% funded today.
Worries about the prospect of a US recession sent equity indices plummeting yesterday and dragged MSCI indices to an even lower start for the year, as investors are concerned any recession in the US will impact all corporate profit potential.
Statistics provided by MSCI Barra reveal investors in equities have had a tough start to the year and will need to see a significant shift upwards in share prices in order to return to the positions held at the start of the year. By close of business yesterday (January 21), the MSCI World index was down 12.18% year-to-date (YTD), while the MSCI Europe index was down 16.04% and the MSCI Pacific ex Japan has dropped 13.78% over the same period. Nordic indices have suffered particularly heavily, as the MSCI Norway index had dropped 25% and the Finland index was down 20% YTD.
This contrasts, however, with activity seen within the last week by BP and Shell which has enacted employer covenant plans to take contribution holidays, based on decisions and data gathered last year. (See earlier IPE story: BP follows Shell on a pensions holiday)
Ann Ellis, director of UK-based Cowen Asset Management, argues the deluge of data about pensions deficit is particularly confusing for pension fund trustees to deal with when colleagues elsewhere in the market are allowing employers to take a break from contributions.
"On the day the FTSE opened nearly 200 points down, pension trustees are being bombarded with conflicting messages," said Ellis.
"On the one hand, we have BP and Shell announcing pension holidays combined with Mercers' quarterly pension deficit survey saying that FTSE350 deficits were down by £37bn to £13bn over the last 12 months (to December 31) while, on the other hand, we're told that pension schemes suffered the largest ever single daily increase in FRS17 deficits yesterday as a result of global stock markets falls.
"Trustees must take care not to overreact to either side of the story and should concentrate on the long-term funding of their scheme. For well-funded schemes and wealthy companies like Shell and BP pension holidays are reasonable so long as they are properly and sensibly policed - other schemes with less envious funding positions should make sure that they continue to fund their schemes prudently.," she added.
Andy Cox, head of global risk services at Hewitt Associates, argues it would have been difficult to predict such a huge swing in the markets in one day would be capable of wiping out virtually all the gains seen by pension funds in 2007.
The Federal Reserve has moved to cut the US base rate by 75 basis points to 3.5% prior to markets reopening in the US today, in the hope it will help improve investor sentiment, however, asset managers elsewhere suggest such a shock and heavy rate cut indicates the Fed is concerned a recession is looming.
Interestingly, however, Paul Niven, head of asset allocation at F&C Investments is predicting despite signs of "panic mode" among investors, short-term volatility suggests any prospect of a recession is also short-lived.
"The fact that markets are now moving significantly based on fairly limited news flow indicates that the bulls have capitulated, and markets are rapidly moving towards pricing in the more pessimistic potential outcomes," said Niven.
"Combining risk appetite and technical signals with our view that any recession would be short-lived, responded to by significant monetary stimulus, and confined to the US (whilst global growth remains intact) this leads us towards expecting a recovery in stock markets and risk assets in general over the coming months.
"Over longer term horizons, valuations within equities and particularly against other asset classes are becoming increasingly compelling. This is reflected in our quantitative process where our models now estimate a high probability of equities out performing bonds," he adds.
If you have any comments you would like to add to this or any other story, contact Julie Henderson on + 44 (0)20 7261 4602 or email julie.henderson@ipe.com
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