Despite increased interest in alternative investments and other diversification tools, investment returns for the typical pension plan still largely mirror the movements of stock markets, analysts said. For 2005, the U.K. FTSE All-Share index returned 22% while the Tokyo TOPIX index of Japanese equities returned about 45%. In Australia, the S&P/ASX 200 index returned 17.6%. Canada's S&P TSX Composite increased by 24.1%. In the U.S., the Russell 3000 index returned 6.4%. All performance was in local currency terms.
"It has been a superb year" in the United Kingdom, said Graham Wood, WM senior consultant. "Pension funds have made a very good recovery from the traumas of the market crash."
However, other economic factors such as lower long-term bond yields have dampened the year's success stories, analysts said. In addition, liabilities continue to plague many pension plans, resulting in increasing deficits despite the strong returns.
"The problem is, the liabilities side of the balance sheet has worsened," said Moyeen Islam, associate director of interest rate strategy at London-based Barclays Capital, referring to U.K. pension plans. "Among many pension funds, the deficit side is growing faster than the asset side."
Among U.K. pension funds, domestic equities posted a hefty 21.6% average return while continental European equities grew 24.9%, both in sterling terms, according to WM. Japanese equities fared best with a 40.5% return for sterling investors. The average U.K. pension plan had a total allocation of about 34% in domestic stocks, 9% in continental Europe and 5% in Japan.
Although pension plans have been moving assets out of U.K. equities, they're not necessarily shifting those assets to fixed income as would be expected under the current trend toward liability-led investing. In many cases, the assets are being transferred to international equities, analysts said.
"Funds have generally decreased the amount invested in U.K. equities and increased the percentage held internationally, so that in 2005, it has got to more or less the 50-50 level," said Mr. Wood. "It may move further (toward the international markets) since a lot of people are nervous about the degree of concentration in the U.K. market."
U.K. pension plan returns were also bolstered by currency movements, particularly in sterling-dollar terms, said Mark Walker, senior investment consultant at Mercer Investment Consultants, London. Although the Russell 3000 gained 6.4% in U.S. dollar terms, the actual return for a sterling investor in the U.S. stock market was 17.5%, or an 11.8% increase as a result of currency movements, Mr. Walker said. U.K. pension plans averaged a 10% weighting toward North American equities.