Soaring pension fund assets boost financial and property markets

By Neil Behrmann

March, 06:- Pension fund assets in the 11 major markets grew by 17 per cent to US$16.4 trillion (US$16,400 bn) last year, according to Watson Wyatt’s “Global Investment Review 2006”. Cash from soaring pension fund portfolios have poured into global equities, private companies, venture capital, commercial property, hedge funds and commodities.

In an attempt to boost returns the mantra of pension fund managers is to diversify to boost returns and spread risk. But a proportion of this money is being used to speculate in volatile assets such as commodities. The money flows from giant pension funds such as ABP (US$231 billion) in Holland and California Public Employees’ Retirement System (US$200 billion) are huge and are moving into a variety of investments around the world.

Watson Wyatt, an advisor of institutions, estimates that pension fund assets in the US rose by 7 per cent last year to US$8.12 trillion, Japan by 22 per cent to US$3.24 trillion, UK by 20 per cent to US$1.62 trillion, Netherlands by 20 per cent to US$764 billion, Australia by 17 per cent to US$592 billion, Switzerland by 20 per cent to US$464 billion, Germany by 19% to US$287 billion and France by 19% to US$133 billion. Figures were not published for Singapore but investments of the Central Provident Fund, which invests conservatively, are estimated around US$72 billion. That compares with US$49 billion in Hong Kong.

Pensions desperate for returns to offset liabilities

Equities, on average account for 58 per cent of global pension fund assets, according to Watson Wyatt. The growth of assets, especially in Europe and Japan, is mainly the result of their stock market booms. Roger Urwin, Watson Wyatt’s global head of investment consulting warns that despite the recovery of pension fund assets since the bear market of 2000 to 2003, their liabilities are increasing because of the ageing population and greater longevity. The estimated pension fund asset liability position globally is still 19 per cent weaker than in January 2000,” estimates the firm.

Yields on global bonds, the other major asset class of pension funds, have shrunk to levels last seen in the 1950’s, so there is less income to service pensioners. Leading pension fund managers talk about diversity to reduce volatility and boost returns. But to boost performance there has been a considerable increase in relatively risky and relatively illiquid investments. They include high yield junk bonds and emerging market equities in high flying markets in India, Asia and Latin America. A growing proportion of assets have been allocated to real estate, thus boosting commercial property values to heights that concern experts in that field. There has also been investment in private equity and venture capital funds, hedge funds, currency funds and commodities by giant funds such as Dutch pensions ABP, PGGM, Ontario Teachers and others.

If stock markets and more speculative assets such as commodities, were to level off or decline and bloated private equity and venture capital funds were to perform badly, it would be exceedingly difficult for pension funds to offset growing liabilities. In the meantime, despite the economic slow down in the US and potential decline in corporate earnings and geopolitical worries about Iran, Iraq, Palestine, Israel, Russia and North Korea, pension fund managers are sanguine.

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