Pension fund returns at lowest level for five years
Pension fund returns are at their lowest for five years having experienced growth of just 5.41% in 2007.
Figures from Moneyfacts show that pension fund growth was at its lowest level last year since 2002, when funds experienced negative growth of –15.23%. In comparison, pension funds posted growth of 9.17% in 2006 and 18.06% in 2003.
The worst performing pension funds sectors in 2007 were property and Japan, which both experienced negative growth, followed by UK smaller companies, UK equity income and Sterling other fixed interest.
However, funds invested in the Far East and global emerging markers performed better, as unlike the UK these sectors have so far avoided being hit by the credit crunch. Moneyfacts estimates the average pension fund invested in the Far East excluding Japan posted a return of 36% in 2007, while global emerging markets funds achieved growth of 35%.
Richard Eagling, editor of Investment Life & Pensions Moneyfacts, says: “After enjoying four successive years of strong investment returns, most pension holders will have seen only modest gains to their policies during 2007.”
The reason for the low returns is mainly down to volatile stock markets in the UK brought on by the credit crunch in the US. UK commercial property has also performed badly throughout the year.
Philip Pearson, partner at independent financial adviser P&P Invest, says pension holders should take an “eggs in basket” approach to avoid small returns during volatile years.
He explains: “The majority of pension holders are in managed funds which tend to be heavily invested in UK shares. UK shares did not performed well last year, hence the low returns.”
Pearson suggests pension holders take a more proactive approach to their funds by opting for self-selection.
He says: “Balanced portfolios, which include fixed interest, commercial property, UK, EU, US and Asian investment, means that you can overcome the troughs and the peaks in any one given market. An eggs in basket approach lessens the uncertainty of shares.”
The Moneyfacts research comes after the FTSE 100 took its biggest dive for six months, falling below 6,000 points this morning.
But Pearson says the falling market is good news for pension funds with some investment in the UK.
He adds: “A falling market means there is better value to be gained as the market will recover. As long as pension holders aren’t approaching their retirement, then the FTSE 100’s fall should be welcomed.”
A market-weighted index of the 100 biggest companies by market capitalisation listed on the London Stock Exchange. It is often referred to as “The Footsie”. The index began on 3 January 1984 with a base level of 1000; the highest value reached to date is 6950.6, on 30 December 1999. The index is “weighted” by how the movements of each of the 100 constituents affect the index, so larger companies make more of a difference to the index than smaller ones. To ensure it is a true and accurate representation of the most highly capitalised companies in the UK, just like football’s Premier League, every three months the FTSE 100 “relegates” the bottom three companies in the 100 whose market capitalisation has fallen and “promotes” to the index the three companies whose market capitalisation has grown sufficiently to warrant inclusion. Around 80% of the companies listed on the London Stock Exchange are included in the FTSE 100.
Generic, loosely-defined term for markets in a newly industrialised or Third World country that is in the process of moving from a closed economy to an open market economy while building accountability within the system. The World Bank recognises 28 countries as emerging markets, including Argentina, Brazil, China, Czech Republic, Egypt, India, Israel, Morocco, Russia and Venezuela. Because these countries carry additional political, economic and currency risks, investors in emerging markets should accept volatile returns. There is potential to make large profit at the risk of large losses.