Pension systems around the world lost ground in 1994, hammered by falling stock and bond markets.
Negative returns persisted in major pension markets from the United States to Australia.
Even Japanese funds slipped, despite the 13.2% rise of the Tokyo Stock Exchange's Nikkei average, one of the few bright spots among major stock markets last year.
Poor-performing bond and international equity portfolios dragged down funds in Japan, causing the median Japanese pension fund to return -0.85% last year, according to one preliminary estimate.
Of six major pension markets, Australia was hit hardest, losing 6.3%. The median U.S. pension fund, by comparison, fell 0.62%.
"It certainly is a sea of red ink," said Jim Waterman, senior vice president, InterSec Research Corp., Stamford, Conn.
If major markets were hurt by falling bond and stock prices, some smaller ones faced even greater losses. The $25 billion Hong Kong pension market lost about 14% last year, noted Grahame Stott, managing director of The Wyatt Co. (H.K.) Ltd., Hong Kong.
Pension funds there have an average 49% exposure to Hong Kong and other Pacific Basin (excluding Japan) stock markets, all of which suffered in 1994. After 1993's impressive return of 53.3%, the compound-annualized return for the two years was just shy of 15% - slightly better than what Hong Kong funds need to keep ahead of double-digit salary inflation, Mr. Stott added.
Final data won't be available for weeks or months. But preliminary figures show that pension systems around the world all experienced losses last year - despite widely varying asset mixes.
Data came from a variety of sources. InterSec, which provided estimates for Canadian, Japanese and Swiss funds, based figures on its universes of balanced pension fund managers for each of those markets.
InterSec estimated 1994 returns by linking the median manager's actual nine-month return to an estimated fourth-quarter return. Fourth-quarter results were derived by applying index returns for the period to the respective universe's asset mix as of Sept. 30.
Other consultants used similar methods, although The WM Co. and Callan Associates Inc. relied on actual pension fund data for the first three quarters for their respective reports on the United Kingdom and the United States. Data for the Netherlands, however, could not be estimated, given the high proportion of real estate in the average Dutch pension fund portfolio.
Here's a rundown of how each of six major markets fared:
The average Australian pension fund was down 6.3% for 1994, according to preliminary figures from InTech Asset Consulting, Sydney.
Said Ian Rohde, a consultant with John A. Nolan & Associates, Melbourne: "There was nowhere to run except property and perhaps Japan." The strengthening of the Australian dollar - up 8.5% against the U.S. dollar - plus rising Australian interest rates and the Australian stock market's decline all hurt returns, he added.
The average asset mix was 37% Australian stocks, 17% international stocks, 11% real estate, 21% Australian bonds, 4% international bonds, 9% cash and 1% other.
The Australian All-Ordinaries index fell 8.67% for the year, while the SBC Commonwealth bond index of Australian bonds was down 5.67% for the year and the SBC Composite bond index was down 4.66%.
The Australian markets were hit by the Reserve Bank of Australia pushing up interest rates to stem any possible resurgence of inflation. The Reserve Bank's moves were more aggressive than those of the U.S. Federal Reserve.
As of Sept. 30, Australian pension funds had total assets of A$186.6 billion ($141 billion).
Canadian pension funds slipped 0.45% in 1994, primarily dragged down by a -0.45% return from domestic bonds, which comprise 39% of the average portfolio. Canadian equities, at 36% of assets, returned -0.2%.
Exposure to international stocks has been ratcheting up over time, and helped bolster returns, as the Canadian dollar fell, InterSec's Mr. Waterman said. U.S. stocks, at 9.9% of assets, rose 6.9%. Other overseas stocks, at 6.6% of assets, rose 14.4%.
Canadian pension funds had $250 billion in assets at the beginning of 1994.
In comparison, Canadian funds returned an average of 21.3% in 1993, according to InterSec.
Of all major pension markets, Japan's $1.02 trillion one was in the best position to prosper last year. But governmental investment restrictions cap at 20% the amount that Japanese pension funds can invest in domestic stocks, measured at book value.
Thus, the 20.8% average allocation to Japanese equities (measured at market value) roughly offset the negative effect of international securities, whose decline was deepened by the strength of the yen, InterSec officials said.
Japan's Topix index returned 9.1%. Pension funds had 12.1% invested in overseas stocks, which returned -10.3%, while international bonds, at 5.3% of portfolio holdings, returned -9.8%.
In addition, Japanese bonds, at 36% of the average asset mix in the InterSec Balanced Fund Universe, lost 1.3% last year. Japanese convertible bonds, another tenth of the average holding, were flat. Cash, at an average 15.8% of assets, gained 1.9%.
After returning 20.1% in 1993, the median Swiss pension return lost an estimated 4.5% in 1994, weighed down by poor-performing Swiss equities and a strong Swiss franc that punished overseas securities.
The $201 billion Swiss pension market was hurt in almost all asset classes. Swiss bonds, comprising 35.7% of assets, declined 0.6%, while foreign bonds denominated in Swiss francs, at 9.7% of assets, were flat.
The worst news, however, occurred in Swiss equities and international assets. At 19.3% of assets, Swiss equities' return of -7.6% hurt overall returns. Also, foreign equities, at 14.1% of assets, lost 7.2%. Foreign bonds, at 10.4% of assets, declined 10.5%.
U.K. pension funds posted a loss of 3.7% in 1994, as stock and bond markets around the world tumbled, according to The WM Co., Edinburgh.
That compares with a 28.2% gain in 1993, which still gives British funds a compound-annualized return of 11.1% for the two-year period. With 467 billion ($733 billion), the United Kingdom has the largest pool of pension assets in Europe.
The down year was only the second time that negative returns have been produced since performance measurement of U.K. funds began in 1975, noted Peter Warrington, a WM director.
What's more, inflation has averaged only 2.2% a year in 1993 and 1994, he stressed. He noted U.K. funds have achieved a real return of 7% and 8%, respectively, for the 10- and 20-year periods.
Last year, real estate was the best-performing sector, with a 12.8% return. That asset class, representing 6% of plan assets, buoyed the average fund by nearly one percentage point.
But the bad news was in stocks and bonds. U.K. equities, comprising 54% of British fund assets at the end of 1994, fell 5.8%. Meanwhile, overseas stocks, at 24% of assets, shrank 1.6%.
Bonds, comprising a total of 12% of plan assets, also experienced a terrible year. U.K. bonds fell 10%, while overseas bonds dropped 6.3% and U.K. index-linked bonds declined 8.8%.
The median U.S. pension fund probably had a negative return of just less than 1%, according to estimates by Callan Associates, San Francisco.
Callan linked the actual results of its clients for the first three quarters of the year with projected results for the fourth quarter based on the asset allocations of the funds at the beginning of that quarter.
The estimated median returns for all the funds for 1994 was -0.62%, compared with 12.03% for 1993. The Standard & Poor's 500 Stock Index returned 1.27% for the year, while the Lehman Brothers Government/Corporate Bond Index returned -3.51% for the year.
The average asset allocation of the funds in the Callan universe was 46.76% domestic stocks, 38.95% domestic bonds, 5.78% international equities, 1.09% international fixed income, 5.35% cash equivalents, 1.74% real estate and 0.33% other.
Within the Callan universe, corporate plans had the best returns, -0.36% in 1994 compared with 11.03% in 1993, apparently because they had the highest commitments to international equities, 6.95%, and second highest commitments to domestic equities, 37.66%.
Public pension funds were down an estimated 0.59%, while Taft-Hartley plans were down 1.48%.