Outlook for pension funds more challenging – OECD report

The outlook for pension funds has become more uncertain as a result of the eurozone debt crisis and slow economic growth in the developed economies, the Organisation for Economic Co-operation and Development (OECD) said in its latest report on the industry.

At the end of last year pension funds had returned to their pre-crisis levels in most countries, but the industry now faces growing challenges and risks, the 2011 edition of the OECD’s Pension Markets in Focus report said.
“The outlook for future economic growth in the developed economies remains uncertain and sluggish,” it said. Accounting and regulatory changes will also bring new pressures on fund managers.

In 2010, pension funds in most OECD countries recovered on average more than 80% of the money they had lost in 2008. By December 2010, they had recovered $3 trillion of the $3.4 trillion in lost market value.

The exceptions were Ireland, Japan, Portugal, Spain and the US where losses persisted. Net returns grew an average of 2.7% in real terms across OECD countries led by rises in New Zealand, Chile, Finland, Canada and Poland. There were declines in Portugal and Greece.

Public pension reserve funds (PPRFs) increased from $4.6 trillion in 2009 to $4.8 trillion in 2010.  Investment returns were on average lower in 2010 than in 2009 but still positive, according to the OECD data.

Pension funds in 2010 experienced positive net returns on investment of 2.7% in real terms. The best performers among OECD countries were New Zealand with a net return of 10.3%, Chile with 10%, Finland 8.9%, Canada 8.5% and Poland 7.7%.

Pension funds in Portugal and Greece experienced negative rates of investment returns which were respectively -2.4% and -7.4%.

While pension fund assets in most OECD countries climbed back above the level managed at the end of 2007, this was not the case in Belgium, Ireland, Japan, Portugal, Spain and the US.

Bonds – not equity – were by far the dominant asset class in most OECD countries, accounting for 50% of total assets on average. The funds with conservative investment portfolios were ahead in terms of performance for the period, the report said.

The US, Australia, Finland and Chile showed important allocations in equities ranging between 40% and 50% of portfolios. In Austria, Finland, Poland and the Netherlands, the weight of equities in portfolios increased six to seven percentage points and bond allocations fell by a similar amount.

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