Record drops in the corporate pension funding levels in the U.K. and Netherlands — Europe’s two largest pension markets — created by unprecedented volatility are leading some pension experts to question whether current portfolio diversification practices are adequate.
While U.K. and Dutch pension funds have remained focused on the long-term view as equity and bond markets gyrate, regulatory changes in both nations have forced corporate defined benefit plan sponsors to pay more attention to short-term volatility, consultants said.
The 200 largest U.K. pension funds in January recorded an aggregate deficit of £10 billion ($19.6 billion) vs. £2 billion a month earlier, according to data from Aon Consulting, London. Daily swings in deficit levels went up to about £10 billion, the highest level of volatility since Aon first tracked such figures in 2001.
Dutch pension funds also were hurt by falling equity markets; 20% of the pension funds monitored by Mercer LLC’s Amsterdam office fell below long-term required funding levels “in a matter of weeks,” Principal Dennis Van Ek said.
In the past several years, many pension executives have been trying to reduce volatility in funding levels by diversifying out of equities into either fixed-income or alternative investments. But the exercise has not helped much in current market conditions, some pension experts said.
“Pension funds have been going into all these different asset classes because they thought they were uncorrelated,” said Amin Rajan, chief executive officer of CREATE-Research, Turnbridge Wells, England, a consultant to money managers.
“What has transpired is not only that the rest of the world has not decoupled from the U.S. economy, but also the premise that alternatives such as real estate and private equity (act) as diversifiers doesn’t hold either.”
The FTSE 100, Amsterdam Exchanges index, S&P 500 and Morgan Stanley Capital International World equity indexes fell 8.9%, 14.4%, 6% and 7.7%, respectively, in January, all measured in local currency terms.
At the same time, many alternative strategies suffered as well. For example, the Greenwich Global Hedge Fund index returned -2.44% during the same month.
“Listed real estate has been hit very hard, and within the last few months, even direct real estate funds are not adding value anymore as well,” said Mr. Van Ek, whose firm tracks 94 Dutch pension funds with aggregate assets of about e100 billion ($146 billion). While January data for the Netherlands were not available, in Great Britain the Investment Property Databank U.K. Monthly index, returned -1.6% in January.
“Private equity, of course, has been coming under fire as well due to the credit crunch,” Mr. Van Ek said.
“Quite a few (pension trustees) are nervous,” Mr. Van Ek said. “They’re trying to figure out how they can properly diversify.”
