EUROPE - UK pension funds saw the steepest decline in solvency ratios in the first half of 2008 thanks to falling asset values and rising inflation, according to Lehman Brothers.

In the latest Lehman Brothers' European Pension Briefing, looking at European pension schemes in the first half of this year, UK pension funds were found to have seen an erosion of ratios due to the effects of the credit crunch, with solvency levels falling 13%.

The firm's biannual Pension Fund Solvency Indicators, designed to track changes in solvency levels for typical pension funds in the UK, the Netherlands and Germany, show German funds lost 9.7%, while Dutch fund ratios fell the least, by 8.3%, because of a relatively high exposure to alternatives.

The main culprit for the decline was losses on equity portfolios, which posted a decline of 10% in the first half, affecting solvency levels due to pension funds' high exposure to the asset class.

With the exception of inflation-linked gilts, fixed-income assets also weighed negatively, and property values continued to fall.

The study found that funds which increased their exposure to commodities were rewarded with returns over 30% as oil reached record highs.

Alan Rubenstein, head of the European Pensions Advisory group, said the results were a reminder of the impact of hedging and asset allocation on fund performance: "In the UK, funds that hedged their liabilities saw funding levels fall by 4% less than those that did not."

He added: "The relative resilience of Dutch pension schemes highlights the value of diversifying portfolio through alternatives."

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