British pension funds recover 2008 losses but new report warns of deteriorating climate for pension savings

News - Funds

Written by Ray Clancy

Thursday, 07 January 2010 09:37

British pension funds managed to recoup most of their 2008 losses last year, helped by strong performances in equity markets, according to asset experts.
On average UK pension funds posted an estimated weighted return of 14.9% against the Retail Price Index monthly inflation measure or 12.8%, says the latest report BNY Mellon Asset Servicing. It is their best performance since 2005.
‘Following the worst annual return for over 30 years in 2008, pension funds clawed back most of those losses by the end of 2009, despite the poor start to the year,’ said Alan Wilcock, BNY Mellon Asset Servicing performance and risk analytics manager.

With the exception of UK inflation-linked gilts, bonds posted negative returns during 2009 with UK bonds yielding -1.2% and overseas bonds providing -9.7%.
The estimates will be welcome news to UK pension funds which accumulated hefty deficits as asset values shrank with the global downturn and factors like longer life expectancy added further to their liabilities.

Index-linked gilts, which offer inflation adjusted returns, yielded 6.4% over the same period. While Property struggled with returns of -5.6%.
But the latest pension survey from the Association of Consulting Actuaries is a damning indictment of the UK government’s pensions policy. Research from the ACA also highlights the continuing and accelerating decline in final salary pension schemes in the run up to the introduction of pension accounts in 2012 which it claims is likely to make many employees worse off.

Almost two thirds of employers are set to review pensions ahead of 2012 and some are looking at pension benefit reductions when they have to auto-enrol all employees into a scheme, the report says. Auto-enrolment will double some employers’ costs and the survey shows that only 32% of employers have budgeted for this while 15% are considering closing their scheme altogether.
The ACA survey also found that nine out of 10 final salary linked schemes are closed to new entrants with one in five now also closed to future accrual. This is double the number compared with four years ago.

‘Concerns over the affordability of auto-enrolment are a genuine threat to existing schemes of all types. With taxes on business and individuals likely to rise over the next few years, it is difficult to see anything other than a deteriorating climate for pension savings unless there is a radical change of approach,’ says the ACA report.
Funding final salary schemes has become increasingly expensive in recent years with much lower returns on equities. At the time of the survey, 91% of schemes were in deficit, with the average ongoing funding level at 79%, down eight points on two years ago. A fifth of schemes reported recovery periods of over 10 years before deficits are removed.

ACA Chairman, Keith Barton warned that government pension policy concentrates on protecting the benefits of older employees to the detriment of younger workers. ‘There needs to be a more balanced approach where the rising numbers of under-pensioned in the private sector get a better deal with employers’ costs capped and with proportionate protection across all age groups,’ he explained.