Though private pension funds
staged a solid recovery in 2009, a study by the Organisation for
Economic Cooperation and Development of trends in its member
countries reveals that damage sustained in the financial crisis was
not fully repaired. Defined benefit funds in particular remain a
major area of concern.
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Worldwide, the road to recovery for
private pension funds is proving to be a tough one, reveals an
analysis by the Organisation for Economic Cooperation and
Development (OECD).
In the OECD’s 31 member countries,
the international body found that despite the equity market
recovery which began in March 2009, private pension funds in
aggregate had by the end of 2009 recovered only $1.5trn of the
$3.5trn in market value that they lost in 2008. This left pension
fund values still 9% below their levels at the end of 2007.
However, the situation differed
widely from country to country, with some having already more than
recovered completely from their 2008 losses. The OECD found that
the biggest recovery occurred in Poland, where private pension fund
assets ended 2009 28.3% above levels at the end of 2007. Increases
were also recorded in Hungary (23.3%), New Zealand (11.3%), Norway
(9.2%), Chile (8.4%) and Iceland (3.5%).
The US remained by far the biggest
private pensions market, with total assets of $9.6trn at the end of
2009, and accounted for 57.5% of total OECD private pension assets,
down from 67% in 2001.
Other OECD countries with large
private pension fund systems include the UK with assets worth
$1.6trn (9.5% the OECD pension fund market in 2009) the Netherlands
and Japan at $1trn each (6.2%) and Australia and Canada at $800bn
each (4.8%). The remaining 25 OECD countries had total pension fund
assets valued at about $1.8trn, 11% of the OECD total.
Measured in terms of GDP, the
Netherlands was way out front, with private pension fund assets at
the end of 2009 equal to 129.8% of GDP. Of major OECD countries,
second was Australia, at 82.3%, followed by the UK at 73%, the US
at 67.8% and Canada at 62.9%.
Among major OECD countries notably
small private pensions markets included Japan at 25.2% of GDP,
Spain at 8.1% Germany at 5.2%, Italy at 4.1% and Korea at 2.2%.
Public pension funds in OECD
countries generally fared better than their private counterparts,
ending 2009 with total assets of $4.5trn, on average 7.3% higher
than at the end of 2008, and 13.9% higher than at the end of
2007.
Defined benefit problem
grows
Company sponsored defined benefit
(DB) pension schemes and those offering some form of return or
benefit guarantee remained a significant feature in OECD countries,
accounting for about 60% of OECD pension assets.
The funding picture of DB schemes
remains bleak. Notably, the OECD found that DB schemes in only two
countries it studied reflected surpluses. They best funded were
those of South African listed companies, which reflected an
aggregate surplus of 10% at the end of 2009, down from 15% in 2008
but up from 9% in 2007. Brazilian companies also reflected a
surplus, though lower at about 3% and unchanged from 2008.
The most dismal picture is
presented by Japanese companies, which ended 2009 with DB pension
deficits of 45%, up from 35% in 2008 and 29% in 2007. Trailing
Japan were Belgium, Norway and Sweden which ended 2009 with
deficits in the 30% range.
In the US, DB pension deficits
ended 2009 at 22%, an improvement from 2008’s 27% but way up on the
7% at the end of 2007. Also in the 20% deficit range at the end of
2009 were Australian, Irish and Finish companies. In the UK, where
perhaps more is made of DB scheme deficits than in any other
country, the average deficit was 16%.
Asset
allocation
As always asset allocation varied
widely across OECD countries. Equity, the source of major asset
value volatility in recent years, remained firmly in favour in a
number of countries with Australia leading with equity accounting
for some 54% of total private pension assets. Australia was
followed by Chile (47%), the US (46%), Finland (40%).
Though final data for the UK and
Ireland were not available, the OECD noted that equity levels of
over 60% are targeted in the two countries. Of major OECD countries
with very low equity exposure were Japan, Spain, Italy, Germany and
Korea with a range of from 12% down to 2%.
The OECD found that bonds and bills remained the dominant asset
classes. However, the OECD also pointed to a shift towards
alternative asset classes. For example, the OECD found that
property is already a significant component of pension fund
portfolios in Portugal, Finland, Canada and Australia with exposure
ranging from 5% to 10% of total assets.
