Equity Bounceback Gives UK Pensions Good Year

January 7, 2010 (PLANSPONSOR.com) - Initial estimates for State Street Corporation's WM UK Defined Benefit Pension Fund Universe and WM UK Charity Fund Universe suggest that the average pension fund trustees will be looking at returns of 15%, while charity trustees will enjoy returns of around 19%.

U.K. equities, strategically the largest component of the majority of funds, according to State Street, bounced from a low point in March to return 30% for the year – in line with the FTSE All Share index.  International equities, which now make up just under 30% of the average fund, had mixed results for the U.K. investor, according to a press release. 

The Pacific region (excluding Japan) and the emerging markets gained 50% and 55% over the year, with North America and Continental Europe returning 17% and 19%, respectively. Japan returned -6%. Currency was a major feature of the international returns, as Sterling strengthened by around 9% against the euro, 12% against the U.S. dollar and 15% against the Japanese yen.

Bond returns reflected a returning risk appetite, the press release said.  Government bonds generally showed modest declines, such as U.K. Government bonds for example, which fell 1% over the year. Corporates staged a strong recovery as the yield gap closed and returned around 11%.  U.K. Index Linked bonds returned 8% as fears of deflation receded.

Among alternative strategies, hedge funds returned 10% overall, although returns varied widely, and other strategies were negative.  Property values continued to decline with a return of -2% for the year.

“In isolation, it was a stellar year for risk assets, both equity and corporate bonds, while the safe havens of cash and government bonds languished,” said Jeanette Patrizio, vice president of State Street Investment Analytics, in the press release. “However, the returns in the latest year represent only partial recovery of the significant investment losses that were rooted in the collapse of the credit market and the sharp economic recession it precipitated.”

State Street said that while funds generally disinvested from equities over the year, the equity weight increased due to the relative strength of markets.  Additionally, money was withdrawn from bonds and invested primarily in alternative asset classes, with private equity and hedge funds the main recipients.