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Impact Investing

IPE special report May 2018

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UK pension fund returns hit 29-year low - WM

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UK – UK pension funds reported negative investment returns of –13.9% in 2002 – the worst annual return since 1974, according to research conducted by the WM Company.

Weak equity markets have been the driver of negative investment returns, says the research, with UK equity return of a typical fund last year being –22.5%, and international equity portfolios returning –24%. Japanese and pacific ex-Japan equities performed better than North America and continental Europe equities.

Bonds and property produced positive returns. Both UK government bonds and UK corporate bonds returned about 9.6%, with overseas bonds just behind at 9.3%. Index-lined bonds returned 8.7%. Property returned 9.1% over the year. the three-year annualised property return is almost 9% per annum, and at 11% per annum over the last ten years makes it the leading asset class.

Despite the negative returns resulting from equities, UK pension funds seem to be prepared to accept the inherent volatility in order to “secure additional long term return,” says the research. In 2002, there was net positive investment by funds into equities, particularly into international equities, and predominantly US equities, with the aggregate equity purchases coming mainly from existing liquidity and sales of bonds - especially overseas bonds. Equity exposure for typical UK pension funds at the end of 2002 was 65%.

Comments Eric Lambert, head of client consultancy at WM, which is now part of State Street Corp.: “Negative investment returns have placed considerable pressure on pension fund finances. Asset values have been falling while liabilities continue to rise, not least due to low bond yields and improving mortality.

“This financial strain has been exacerbated by the accelerating maturity of funds and by regulatory, Minimum Funding Requirement (MFR) and accounting standards (FRS 17).”

The funding deficit for UK pension schemes is estimated to be around 130 billion pounds (197.5 billion euros) under the FRS17 accounting rule - although the actual deficit is around half that figure, says pension consultant Watson Wyatt.


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