UK – Consulting firm Mercer says pension funds could lose money by investing in commodities due to current market conditions.

“Pension funds that currently invest in commodities, or those that are looking to do so, should be aware that they could lose money by following the traditional passive futures approach to investment, even if prices remain stable,” Mercer Investment Consulting said.

It said the current “contango” – where futures prices are higher than spot prices - means returns will be lower than the change in commodity prices.

“While commodity prices rose significantly in the year to 31 March 2006, the return on commodity futures was flat.”

In March this year rival firm Watson Wyatt was reported as recommending commodities, particularly energy, to its clients

“If there is an increase in the number of investors seeking to purchase commodity futures, then prices can be pushed up,” said Mercer’s European investment policy director Andy Green. “This could be one of the reasons why markets have fallen into contango.”

Mercer said commodity futures investors need spot prices to rise above futures prices for there to be a positive ‘roll yield.’

However, if cash flows into commodity markets remained high, there was a risk that commodities futures will stay in contango.

In April and May, the impact of the markets being in contango was a drag on the return of the GSCI, the main commodities index, at an annualised rate of over 10%.

Mr Green said: “On balance, demand for commodities is likely to remain strong, at least in the short term. But, it is questionable how long prices of both oil and metals, which make up over half of the main commodities index, can persist before supply increases.”

Elsewhere, Mercer Human Resource Consulting said that Irish defined benefit schemes have shown a significant improvement in solvency.

It said two-thirds of DB schemes are currently meeting statutory solvency test, up from 50% a year ago.

Employer contribution rates had doubled over last few years, with the average contribution rate now at 17%.