WM Performance Services has released its pension fund survey results for the second quarter of 2005.
According to the survey, UK pension funds surged ahead after a subdued first quarter to post average second-quarter returns of 5.1%, making Q2 the ninth straight quarter of positive return and boosting year-to-date returns to 7.0%.
The quarter got off to a bad start with most equity markets in retreat, poor news from consumer related companies and increasing energy costs undermined confidence. Sentiment changed, however, as the probability of interest rate cuts grew and economic news improved.
The combination of better investment returns and generally increased employer contributions is starting to close the funding gap that exists in many UK defined benefit schemes.
For the quarter, both UK and Continental Europe equities posted returns of 4.7%, while better North American equity returns of almost 7.7% to the sterling investor were mostly due to dollar appreciation.
In the Far East equity results were mixed – Japan returned 2.2%, compared with nearly 9.6% for the rest of the Pacific Rim. Bonds returned over 5 percent for the quarter, as buying pressure continued and the prospect of a fall in interest rates emerged. Property continued its steady advance returning nearly 5%.
“The absolute value of the average fund has recovered to its pre-crash (end December 1999) level,” said Graham Wood, a senior consultant at WM Performance Services. “This is good news, but the pension problem still exists – simply looking at the growth in assets misses the point that the cost of providing pensions is linked to bond yields and better life expectancy. So while we expect that there has been some recovery in funding levels, the majority of funds will still be trying to close the gap.”
In aggregate, money continued to flow out of the UK equities asset class, with almost £1 billion going to non-UK equities and a further £1 billion to monetary assets (bonds and cash). Proportionately, the size of the movement was small and left the overall exposure to equities unchanged. However, within equities, the UK weight fell by another 1 percent, bringing the UK-International equities split closer to 50:50. In bonds, over £1 billion shifted from conventional UK bonds to Index-Linked, although the effect on the percentage split across bonds was small.