In 203 UK pension funds had their first positive year since 1999, according to the WM estimate of returns. “After a poor start, UK pension fund returns accelerated throughout the rest of 2003 to achieve a result for the year of 16.8%,” says Graham Wood, consultant at the WM Company. “This is the first positive performance since 1999.”
WM says equity markets staged a marked recovery from the lows reached in March. The combination of better economic news and the removal of some of the geopolitical uncertainty was a panacea for hard-pressed investors. UK equities returned 21.2% and, in addition, the strength of the Euro, which rose 8.1% against the Pound boosted the Continental European return to 28.4%. Conversely, however, the 10.1% slide in the US Dollar against the Pound restricted the North American result to 16.2%. In the Pacific, Japan offered a return of 20.1% while the smaller markets surged ahead to deliver growth of 30.4%.
Within equities, the main interest was in stocks and sectors that had been out of favour. For example the FTSE Information Technology sector, which had struggled since the collapse of the TMT (Telecoms, Media, Technology) bubble, achieved a return of approximately 65.8% for the year. There was also a marked divergence of results between small and large cap companies: in the UK, for example, the FTSE 100 rose by 17.9% while the FTSE 250 was up 37.9% and the
FTSE Fledgling by 61.8%.
Compared to equities, bonds were lacklustre. UK Bond yields fell initially on concerns about global deflation but subsequently rose as accelerating global economic growth raised inflationary fears, to end the year much as they started, generating a return of 3.6%. Overseas Bonds provided similar returns, while the UK Index Linked category delivered 6.7%.
Property had another solid year, returning 9.9%.
Asset allocation moved a little toward equity over the year mainly due to the differential in equity and bond performance.
Pension funds, however, took the opportunity of UK Equity strength to switch money into UK Bonds indicating that they are mindful of their overall strategic direction to increase UK Bonds but that they have a market timing overlay. Within equities there was a shift of money away from the UK in favour of North America reflecting both the greater internationalisation of equity investment and the importance of North America within the global market.
Money was also withdrawn from Overseas Bonds as they disappear from customised benchmarks due to their lack of pensions liability matching characteristics.
In aggregate, UK segregated pension schemes paid out money last year, demonstrating the increasing maturity of the UK pension fund industry. Benefit payments exceeded receipts from employee and employer contributions and the income generated on investments.
“There is no doubt that 2003 will have offered pension funds some welcome relief from the gloom that has enveloped them in recent years,” concludes Wood. “Many will have had their funding positions improved as a result of the returns available. It remains to be seen whether these improvements will continue through 2004.”