SPAIN - Spanish pension funds ended 2011 in much better shape than in the third quarter, but their return on investments remained deeply affected by falling equity markets and the European sovereign debt crisis.

The latest figures from the Spanish investment and pension fund association (INVERCO) show that local pension funds finished the year with a slight 0.76% loss, after having lost 3.1% over the previous three quarters.

In its analysis, INVERCO said the annual results had been mainly due to higher returns provided by equities and bonds over Q4.

In a previous interview with IPE, Ángel Martínez-Aldama, director at INVERCO, said most of the losses could be attributed to sovereign debt.

"The losses are mainly due to the equity market fall experienced this summer, but not only," he said. "Traditionally, pension funds' exposure to equities has been relatively low. Even though the overall asset allocation to this asset class stood at 30-35% three years ago, now this exposure has been lowered to around 20%.

"However, I would attributed the losses recorded by Spanish pension funds over Q3 to fixed income products and more especially to government bonds, as the asset class has taken a serious hit since 2009 due to the sovereign debt crisis in Europe."

Martínez-Aldama added that, even though the losses were significant, pension funds would need to bear in mind that, due to their long-term liabilities, they should look at medium and long-term returns on investment rather than focusing on the short term.

"Therefore, looking at the next 20 years, we expect pension funds in the country to reach an average return on investment of 5% per annum," he said.

According to INVERCO, since 2007, Spanish pension funds have progressively reduced exposure to local and foreign equities, as well as to foreign bonds.

At the same time, they have increased allocations to local sovereign debt from 11% in 2007 to 30% in 2011.