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Market crisis wipe $5trn from pensions

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  • Market crisis wipe $5trn from pensions

GLOBAL - Falling stock markets has wiped $5trn (€3.78trn) off the value of private pension plans across the world, and approximately two-thirds of that applies to US funds only, The Organisation for Economic Cooperation and Development (OECD) has suggested.

The OECD's latest Pension markets in Focus newsletter indicates pension plans in the UK, Australia, Canada, the Netherlands and Japan have seen their assets reduce by $1.2trn compared to December 2007, as pensions in OECD countries have fallen by around 20% in the last year.

More specifically, it noted pension funds have been hit hardest in OECD countries where equities make up over a third of total assets invested, and flagged Irish pension funds as experiencing the worst investment performance, losing just over 33% of their value in real terms.

The full impact on investment returns will only be revealed once annual reports
for 2008 have been submitted by pension funds to their supervisory authorities, noted the OECD.

It also recognised there is a lack of clarity over the valuation of some illiquid
assets - those that cannot be turned into cash quickly - such as real estate or "so-called
structured products, which combine a periodic payment at a predetermined rate and another component, often the option to buy or sell an asset at some time in the future".

Its analysis has also found direct exposure to what are now considered to be "toxic" assets such as structured products and asset-backed securities may be as high as 3% of assets under management for the pension fund industry as a whole.
 
The OECD argued this underlines "the urgent need for further reforms of private pension system" as companies may have to pay more into their defined benefit funds in particular to make up the funding deficits, at a time when they are already under pressure and may therefore consider again the need to close schemes to new employees.

The report noted some countries - the US, UK, Germany and Sweden - have guarantee funds that insure benefits if a sponsor goes bankrupt, but argued these may need further government funding if firms go bankrupt.

Further analysis of the market impact on pension funds will be released at a later date in an additional document, entitled "Private Pensions Outlook", according to officials.

A review of guidance on pension fund governance will also be published in January 2009, said the OECD.

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