Pension fund returns at lowest level for five years

16 January 2008

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.”

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