US - A wide gap is developing between the assumptions used by US pension and their rate of return expectations for a number of asset classes, according to research firm Greenwich Associates in Connecticut.

Corporate pension funds’ current actuarial rate return of 8.8% is higher than their rate of return expectation for all but three asset classes, the research firm found in its most recent study of US pension funds. International equity, equity real estate and private equity are each expected to produce higher returns, but these three classes only account for 15% of corporate funds assets.

“The corporate funds’ higher actuarial rate begs the question of where this anticipated surplus is supposed to come from,” says Rodger Smith, consultant at Greenwich. He points out that corporates are anticipating 11.1% rate of return from private equity which seems “especially challenging considering the generally dismal performance of private equity in 2001”.

But the consultants say questions hang over public funds’ approach as well. Even though they report a more modest actuarial assumption of 8.3%, these funds’ rate of return expectations in a number of classes anticipate stronger performance levels than recent experience merits. In particular they mention international equity at 9% and private equity at 13.5%.

The research also highlighted the fact that US corporations’ 401k plans have some $300bn(E340bn) placed in their own company securities. The situation is especially acute at the largest funds, where internal assets represents nearly 36% of total DC assetws for funds over $5bn, says Greenwich. Correction of this position is inevitable, the consultants predict.

Other findings of the survey, conducted late in 2001, show total fund assets decreased in the US for the first time in 10 years, by an average of 7.6%, with corporate and endowment funds losing 9% overall. Greenwich reckons a total market loss of $475bn for the year.

US pension and endowment funds holdings of domestic equities fell last year to 49.5% (52% in 2000) of asverage portfolios, the firsat time since 1996, when US stocks made up such a small proportion of portfolios. Fixed income allocations rose to 26% of assets, its highest level since 1996. “Fund professionals do not expect this to become a trend,” says Greenwich, as more managers expect a significant decrease in fixed income allocation in the next year. Private equity stayed level at 3% of fund assets.