Newspaper article The Evening Standard (London, England)

Serious Consequences of Pension Funds' Poor Returns

Newspaper article The Evening Standard (London, England)

Serious Consequences of Pension Funds' Poor Returns

Article excerpt

Byline: ANTHONY HILTON

INVESTMENT professionals have proved pretty inept at coping with the turbulent markets of recent times. According to Combined Actuarial Performance Services Caps, which measures pension funds' performance, pension schemes sank in value by 7.2% on average in the first quarter of this year - the fifth quarter in a row showing negative returns.

Caps analysed 88 fund managers holding nearly [pound]200 billion, yet the fact that such a big slice of the industry produced its worst first-quarter performance since 1974 has caused surprisingly little stir.

Of course, the 10-year average of funds is still much higher at 11%.

But that may not be a great comfort to finance directors and companies that sponsor pension schemes, particularly if markets keep falling.

Pension fund surpluses are rarely left to accumulate - they get eaten up in higher benefits for members and contributions "holidays" for sponsoring companies.

The poor performance therefore has potentially serious consequences. If markets continue to languish it will not be long before actuarial valuations show that growth in the funds' assets may be insufficient to meet potential liabilities. So more cash will have to come in and the only realistic source is the sponsoring company.

The last time this happened extensively was in the mid-1970s when sick markets and galloping inflation wrought havoc with the schemes' solvency.

Companies had to increase the amount they paid in and often also made one-off payments of many millions of pounds to top up the funds. The effect on their profits was devastating.

Markets have not been weak enough for long enough for us to fear a rerun of the 1970s. But the margin of safety is not particularly large and the situation could deteriorate rapidly if shares continue to fall and interest rates stay low. …

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