The U.S. was in fifth place for real returns with 6.6% according to preliminary data from Bank of New York Mellon Corp., down from fourth place in 2013 with a real return of 11.5%. The 2014 return came despite the impressive returns from the Russell 3000 index.
“Median U.S. plan performance was lower in 2014 mainly due to the significant drop we saw in equity returns, coupled with slightly lower allocations to equities as an asset class,” said John Houser, senior consultant for BNY Mellon's global risk solutions group, in Boston.
The Netherlands, on the other hand, reversed course to become the leader among pension markets in 2014. The biggest contributor to this performance was the average Dutch pension fund's interest rate hedges, using duration from longer-dated bonds, said Dennis van Ek, principal and investment consultant at Mercer in Amstelveen, Netherlands.
“The overall 2014 headline investment return will be higher in the Netherlands than in most other countries — the reason is that Dutch funds have implemented interest rate hedges more than pension funds in other countries,” said Mr. van Ek. The reason, he said, is related to the longer-term liabilities in the Netherlands, compared with other markets.
But that alone, said Edward Krijgsman, Amstelveen-based principal and investment consultant at Mercer, is not enough to give such a strong return. He said euro-based investors benefited from a depreciation in the euro. The euro depreciated 11.97% vs. the dollar in 2014. “Typically, Dutch pension funds tend to hedge about half of their foreign currency risk,” he said.
Liabilities also increased, with pension funds reporting an average 17% increase in liabilities. “However, using the market value of liabilities, which excludes the ultimate forward rate and excludes averaging, liabilities increased by 26.3%,” said Mr. van Ek. That means funding ratios would have dropped.
U.K. pension funds delivered the second-best return of the seven markets, at 11%, and a 10.45% real return, according to preliminary figures from State Street Corp.'s investment analytics business, up from 9% in 2013.
The U.K. FTSE All-Share index also was up, although only with gains of 1.45% in U.K. pound terms, down from 23.6% in 2013, and U.K. pension funds had an average allocation to equities of just under 40%, said Phil Edwards, Bristol, England-based principal at Mercer. Mr. Edwards put the average U.K. fund returns between 10% and 15% overall.
“The big difference will come from the extent to which schemes were invested in gilts and (which) had hedged their liabilities quite highly. Long-dated gilts — fixed and index-linked — were two strong performers. Schemes that had hedged their liabilities with long-dated gilts would have seen stronger returns than those that hadn't,” he said.
This year, U.K. pension funds might be putting more focus on their alternatives portfolios to deliver growth. “We think the environment for alpha-focused strategies is probably improving; we think with diverging monetary policies (between the U.S. and U.K., and Japan and Europe), there will be more volatility and dispersion, which should be good for hedge fund strategies in particular,” said Mr. Edwards.
In Japan, all eyes were on the Government Pension Investment Fund, Tokyo, and the ¥127.3 trillion ($1.1 trillion) pension fund's October decision to increase its equity allocation to 50% from 24%.
“Even though Abenomics looks to be successful, corporate pensions are still moving in the direction of derisking,” said Konosuke Kita, director of consulting at Russell Investments in Tokyo, referring to the economic program instituted by Japanese Prime Minister Shinzo Abe. “But the pace of decreasing equity (allocation) has been slowing. On the other hand, GPIF has been increasing its equity allocation ... other public pension funds may follow this example and raise equity allocations,” he said.
The Nikkei 225 returned 8.91% in yen terms, down from 59.39% in 2013. In 2014, Russell's universe of corporate pension funds in Japan returned an average of approximately 8%, giving a real return of about 5.6%, taking inflation into consideration, compared with 13.4% in 2013.