After experiencing dismal returns in 1994, pension executives from New York to Sydney rejoiced in robust performance powered by last year's strong stock and bond markets.
Returns ranged from 11% in Switzerland to 25.2% in the United States.
"The most notable thing about 1995 is that high real returns were achieved in all markets," said Jim Waterman, senior vice president, InterSec Research Corp., Stamford, Conn.
Low worldwide inflation rates meant pension funds were able to chalk up high real returns - key for pension funds to outstrip growth in their liabilities.
"Overall, it was an excellent year for (U.S.) pension funds, with their assets increasing by 25% in one year," said Ron Peyton, president and chief executive officer, Callan Associates Inc., San Francisco.
Mr. Peyton noted that although interest rates had dropped - increasing the value of pension liabilities - the rise in the value of assets should have been more than enough to offset the heightened obligations.
One of the interesting aspects of performance in 1995 was the role of overseas investments.
"In some cases, it was a huge help. In other cases, it was a dampener," Mr. Waterman said.
For example, international equities provided a 23.4% boost for Japanese pension funds, which had been dragged down by a paltry 2.1% return from domestic equities. In contrast, U.S. pension funds gained only 11.2% from international stocks last year, compared with a staggering 37.5% from the Standard & Poor's 500 index stocks (including dividends).
Craig Ueland, managing director, international operations for Frank Russell Co., Tacoma, Wash., cautioned that trustees shouldn't count on 1995-type returns to continue.
InterSec provided estimates for Canadian, Japanese and Swiss pension funds, based on figures from its universes of balanced pension fund managers in those respective markets. Returns for 1995 were estimated by linking the median manager's actual nine-month return to an approximate fourth-quarter return, based on index returns applied to the median asset mix as of Sept. 30.
The Edinburgh-based WM Co., which estimated the U.K. returns, and Callan Associates, the source of the U.S. returns, relied on actual pension fund data for the first three quarters, projecting fourth quarter data. John A. Nolan & Associates Pty. Ltd., Melbourne, calculated Australian returns based on the average asset allocation for the year multiplied by index returns.
Here are the highlights of 1995 performance from leading pension fund markets around the world:
When Australians return from their summer holidays, they will find a relatively small gap in returns between the $30 billion corporate plans and newer-style $8.3 billion industrywide defined contribution plans, despite their varied asset mixes.
Corporate funds - nearly all defined benefit - returned 18.8% last year. They were fueled by a 20.2% return from domestic equities, which account for 42.2% of total assets. International equities, comprising 13.9% of assets, provided a 26.7% kicker.
Industrywide funds, which are mostly defined contribution plans returned 17.6%. Only one-quarter of their assets were invested in domestic stocks and 8% in overseas stocks.
But 24.8% of the defined contribution plans were invested in Australian bonds, which returned 18.6%. (Corporate funds had only 9.5% invested in domestic bonds.)
Both types of funds, however, had more than 10% of assets invested in inflation-linked bonds, which produced 19% returns.
Drags on performance were real estate and cash, which returned only 7.6% and 8%, respectively.
Corporate funds had 13.7% of their assets in real estate, compared with a 9.5% allocation by the industrywide funds. Corporate funds had only 4.4% of assets in cash, vs. 14.8% for defined contribution plans.
There is approximately $73 billion in pension funds for very small companies and individuals in Australia. Much of this is managed in pooled funds for which the median return in 1995 was 15.7%, according to Mercer Investment Consulting, Melbourne. In 1994, the median return of these funds was -6.1%.
(Another $42 billion in Australian pension fund assets are in public employee funds for which data were not available.)
Canadian pension funds, with some $238 billion at year-end 1994, turned in a strong 17.3% performance in 1995.
They were buoyed by strong returns from domestic equity and bond markets. According to InterSec, the median Canadian balanced pension fund portfolio had 38.4% of total assets invested in Canadian bonds, which returned 20.7%, and 38.7% of assets invested in domestic stocks, returning 14.5%. But U.S. stocks - at 9.1% of the median fund's assets - contributed a healthy 33.2% return. Other international equities, at only 6.9% of assets, chipped in only 8.3%.
In contrast with other major pension markets, Japanese pension funds gained little help from their domestic stock market. The TOPIX index returned only 2.1% last year.
With one-fifth of assets invested in Japanese stocks, performance suffered. But Japanese funds' 13.3% allocation to international equities - which provided a 33.8% return - helped soften the impact of poor domestic performance, according to InterSec's Mr. Waterman.
Japanese funds' investments in Japanese bonds - at 37.1%, their largest allocation - boosted returns by 11.9%, while their 7.9% allocation to domestic convertible bonds added in 12.1%.
But sizable cash holdings - at 14.5% of assets - added only 1.8% to portfolio returns.
Frank Russell's Mr. Ueland said InterSec's estimated 13% return for Japanese pension funds probably is overstated because it relies on data from independent investment advisers. The real figure - at least for Japanese corporate funds, which comprise nearly more than half of Japan's $1.1 trillion pension market - is likely in single digits, Mr. Ueland said.
He said the average Japanese corporate pension fund invested nearly half its total assets with life insurance companies, and virtually all of the remainder with Japanese trust banks. Japanese life insurers, he noted, provided a guaranteed return of only 4.5%, while the trust banks are very conservatively invested.
Mr. Waterman confirmed InterSec's universe relies on investment advisers and that "it is entirely possible" that actual returns were in single digits.
The good news for "gaijin" money managers, Mr. Ueland said, is that poor returns probably will accelerate the trend toward greater use of investment advisers.
Strong domestic stock and bond markets lifted Swiss pension returns to 11% last year, but the Swiss franc's rise hurt international returns.
With nearly two-fifths of their assets invested in domestic bonds, the $191 billion Swiss pension market benefited from their 12.3% rise. Another 9.4% was invested in foreign bonds denominated in Swiss francs, adding 11.6%.
Domestic stocks offered Swiss funds the best returns, up 23.1%. The median Swiss balanced fund had 18.9% invested in domestic stocks, according to InterSec.
But foreign equities, at 12.5% of assets, returned only 6.5%, and foreign bonds, at 10.5% of assets, returned a meager 4.1%.
British pension funds, with some $775 billion in assets, chalked up a 19.2% gain - or more than 16% on a real basis.
Over the past five years, U.K. funds had earned a real return of 15.3% a year; the figure is the same over the 20-year period, according to The WM Co.
"People said you wouldn't see" high real returns after the 1980s, noted WM Director Peter Warrington, but "here we are again."
U.K. pension funds provided the best real returns over short, medium and long periods mainly because of their heavy reliance on real assets - equities and real estate, Mr. Warrington added.
U.K. funds had an average stock allocation of 77.5% at the end of 1995. U.K. stocks, at 55% of assets, provided a 23.7% boost. Overseas equities, at 22.5%, pitched in a 14.8% return.
In comparison, U.K. bonds, at 6% of assets, returned 13.3%; index-linked bonds (3%), added 8.8%; and overseas bonds (3.9%), chipped in 16.2%.
Mr. Warrington said while many observers expect U.K. pension funds to invest more heavily in bonds because of their growing maturity profiles, the average equity allocation actually had increased 60 basis points from 76.9% at the end of 1994.
Allocations to property, however, have slid 120 basis points over the past year, to 5.1% from 6.3%, as property returns have failed to keep pace. The top 50 U.K. funds have about 6% invested in property, compared with only an average of 1% for smaller funds, he said.
U.S. pension funds outshined other major pension systems last year, propelled by the S&P's 36.2% outstanding return.
Corporate pension funds, with their higher equity allocations, benefited most, returning 26.1%. On average, corporate funds had 54.2% of total assets invested in U.S. stocks. International equities, which returned 11.2% last year, accounted for 7.6% of U.S. corporate funds' total assets.
Corporate funds also had the smallest average bond allocation, with only 33% invested in domestic bonds and 1.5% in international bonds. Taft-Hartley funds returned 25.3%, while public funds' 24.5% performance.
The collectively bargained private-sector funds had 48.7% invested in U.S. stocks and 44.8% in domestic bonds - with only 2.5% in overseas stocks and nothing whatsoever in foreign bonds.
In contrast, public funds, had 47.2% of assets invested in domestic stocks, 38.3% in domestic bonds, 7.6% in overseas equities and 1.8% in overseas bonds.
Mr. Peyton added it probably was time for most funds to consider rebalancing back to their target allocations. Mr. Peyton said U.S. pension executives probably have become too comfortable with high equity positions.