US- Volatile markets continue to take their toll on US pensions schemes which are now heading for their third consecutive year of negative returns. Figures from Mercer Investment Consulting show corporate funds losing 5.5.% in the first half of the year while public plans and foundation/endowment funds lost a respective 4.1% and 3.8%.

In the year to June, corporate plans lost 6.2%, underperforming public plans and foundations by thirty and eighty basis points respectively. Barry McInerney, head of Mercer Investment Consulting, says there is a distinct chance that schemes will produce negative returns for the third consecutive year, something that hasn’t happened since 1941.

Despite this bleak outlook, most plan sponsors have had their losses contained by extensive diversification. Says McInerney: “most plans built up a cushion during the bull market of the 1990s which has helped to mitigate some of the recent losses.

“The median ten-year plan return on a nominal basis is close to 10%, in line with historical trends and quite strong on a real return basis, given the low inflation environment we have experienced over the last decade.”

The research suggests that, despite long term capital market estimates remaining relatively optimistic, sponsors are addressing short term issues and are increasing cash contributions and reducing funding levels.

Value managers continue to outperform their growth counterparts. US growth managers have returned double-digit losses for the year to date with large cap managers losing 17.2% and small cap managers 14.1%.

Fixed income has already produced returns of 3.7% this year and many trustees, as outside the US, are taking a defensive approach and moving funds into the asset class. This move, however, has forced them to consider the risk associated with fixed income investing.

Says McInerney: “as the fixed income class continues to outperform equities, many plan sponsors have begun to focus on their risk tolerance and the role of fixed income within their portfolios.

“As sponsors become sensitive to the effect of interest rate movements on their underlying pension obligations, many are reassessing how to minimise the mismatch between their assets and underlying liabilities.”