UK pension funds reported the worst returns last year for more than a decade, according to performance measurement consultants WM Company. WM says it is the second consecutive year of negative returns, the first time this has happened since it began its UK pension fund survey in the mid 1970s.
Average returns for funds last year came in at –9.6%, compared with –11% in 1990. UK bonds produced returns of around 3%, in contrast to UK equities, which fell an average 16%. European equities fared marginally worse, down an average 20% while US and Japanese equities fell a respective 12% and 28%.
Last year saw the resurrection of the old economy with the tobacco, general retailing, household goods and construction and building materials sectors all producing double-digit returns. IT hardware stocks fell over 70%, software over 50% and telecoms and media over 35%.
WM says that UK funds continued to diversify out of UK equities into fixed income and international equities. UK pension funds held an estimated 68% in equities at the end of 2001, down four percentage points on the previous year. WM says this significant shift continues a trend that has been evident over the past four years.
Many UK pension funds are moving funds into fixed income, arguing that it represents a more favourable risk/ return profile. It is also in anticipation of FRS 17, the new accounting standard that requires companies to report liabilities on their balance sheets.
Last October the e3.7bn pension fund of the Boots Group announced it was selling its entire equity and short-term fixed income holding in favour of long-term sterling fixed-rate bonds. WM says those funds favouring fixed income will see the benefits in their short-term figures.
Eric Lambert, executive director at WM Company, says the results need to be taken in context. “Over the past 10 years, UK pension funds have produced a return of about 11% per annum, although over the last five years the return is 8%. Both absolute and real returns are reducing despite the lessening impact of inflation.”
Nevertheless he describes 2001 as an extraordinary year and one that most investors will want to put behind them.