2001 was a bad year for most pension funds around the world. Out of six developed countries tracked, only one - Australia - reported pension funds in positive territory overall for the year.
* U.K. pension funds took the worst beating, posting a return of -10%, according to The WM Co., Edinburgh. It was the worst performance since 1990, when U.K. funds returned -11%. In 2000, U.K. pension funds returned -1.8%.
* Japanese pension funds returned -6.8% for 2001, better than the -9.1% posted in 2000, according to numbers from the Frank Russell Co.'s Tokyo office.
* Swiss pension funds returned -6.4%, according to the InterSec Balanced Benchmark, which represents the average allocation of more than 80 Swiss balanced pension fund portfolios. In 2000, Swiss funds gained 3%, according to InterSec Research Corp., Zurich.
* The median U.S. pension fund returned -3.8%, according to preliminary numbers from Callan Associates, San Francisco. That is down from the -0.3% return in 2000.
* Canadian pension funds had a return of -0.6% for 2001, down sharply from 7.4% in 2000, according to numbers supplied by Frank Russell in Toronto.
* In Australia, the median corporate defined benefit fund had a return of 7.2% in 2001, down from 8.1% in 2000. The median industry plan posted a return of 6.7%, down from 8.5% in 2000, according to a report from John A. Nolan Associates Pty. Ltd., Sydney.
Beating the benchmarks
However, pension funds in the United States, Canada and Australia managed to beat the main performance benchmarks, with the Standard & Poor's 500 index down 11.88% for 2001, and the Morgan Stanley Capital International Europe Australasia Far East index down 21.44% for the year.
"I was not as downhearted as others (about U.K. pension fund returns)," said Peter Warrington, executive director of The WM Co. "I've been here before, in 1990, when the returns were -11%."
"In 50 years' time we'll look back and say it was the technology bubble that burst, causing the problem," said Mr. Warrington. He predicts that in a few years there will be another "bubble" in some industry that will heat up the markets then crash again.
A bigger potential problem for U.K. pension plans is an increase in life expectancy, which has led to a 20% increase in pension liabilities. He said pension funds had expected to pay benefits to retirees for 15 years; now it's up to 18 years. "That is a big, big issue for pension funds," he said.
In Japan, pessimism reigns. "Japanese investors, including pension fund sponsors, are very pessimistic about future performance," said Noriyuki Oharazawa, a consultant in Frank Russell's Tokyo office. He pointed out the performance of Japanese equities was bad both in 2001 and 2000. Japanese pension funds have about 35% of assets allocated to Japanese equities.
He said the Japanese funds fared better in 2001 vs. 2000 because of the weakening of the yen, which improved the performance of non-Japanese investments.
Japanese funds are looking for alternative sources of revenue, according to Mr. Oharazawa. Some funds are investing in hedge funds as they "try to find new opportunities," he said, and some are investing in non-Japanese corporate bonds.
In Switzerland, 2001 was "the second year in a row that the returns of Swiss pension funds have fallen below the federally mandated 4% return," said William Libby, director, InterSec. Mr. Libby said when the funds drop below the mandated amounts, companies have to put in the balance themselves.
He thinks the reason for the disparity is the high average weighting of equities vs. bonds. Balanced funds last year had 42.6% of assets in equities vs. 48.3% in bonds.
"An equity allocation of 42% is very high for balanced funds," said Mr. Libby. "Generally, balanced funds have 30% in equities, 60% in bonds and 10% in cash." He pointed out that in 2001, Swiss equities dropped 22% and foreign equities fell 14.4% in local currency terms.
U.S. pension funds got a bounce from a strong fourth quarter with returns of about 6.5%. "Without that bounce, they would have been down 9% or 10% for the year," said Jay Kloepfer, head of quantitative consulting at Callan.
Many U.S. funds also benefited from being more diversified, having less money in large-cap stocks and more in bonds, Mr. Kloepfer said. "Small-cap value stocks were up 14% for the year," he said, giving the return of the Russell 2000 value index. He thinks this boosted U.S. pension fund returns too.
"Maybe we've escaped the worst of what the world has experienced, although there is a sense of gloom in the financial community (in Canada)," said Jim Franks, a consultant in Frank Russell's Toronto office.
Mr. Franks pointed out that a fourth-quarter rebound in the stock market helped a lot. "The average fund was down 6% to 7% in the third quarter and gained most of it back in the fourth quarter."
Mr. Franks also noted that long-term interest rates in Canada are about the same now as a year ago, which is a good thing. "If rates had gone down, it would have boosted pension fund liabilities," he said.
In Australia, the positive numbers were due mainly to the strong performance of the Australian stock market, which rose about 10.5% in 2001, according to John Coombe, divisional director at John Nolan. "We just didn't have the technology companies ... that were in other markets," he said.
Mr. Coombe said several natural resources companies involved in the mining and mineral extraction industries in Australia were the objects of takeovers in 2001, causing the prices of these stocks to rise about 16% for the year.
Also, "the Australian stock market is dominated by banks, which make up 20% of the market, and with falling interest rates banks do quite well," he said.