Low bond yields hit pensions

Pension schemes will struggle to close the funding gap while bond yields remain at current low levels, a conference heard yesterday.

Bond market expert Mr Richard Williams told the Mercer Investment Seminar for fund trustees and sponsors that the risks were weighted on bond yields falling further, rather than rising, as generally expected by the market.

"If bonds are to move very far from today's 'fair value', it will be lower rather than higher," said Mr Williams, chief investment officer with fixed-interest specialists Fischer Francis Trees & Watts, which manages a larger bond portfolio than all Irish fund managers put together.

He suggested that pension funds should put their money into inflation-linked government bonds, the one asset class "guaranteed to increase spending power over time". While that would at least keep pace with future liabilities, it will do little to offset the current funding deficit of Irish pension funds.

Senior Mercer consultant Mr Tom Geraghty told the audience that the stock market slump after the bursting of the tech bubble and rising liabilities had seen Irish funds move from a situation where they were 130 per cent funded in December 1999 to an end-2004 position of being just 67 per cent funded.

Falling bond yields saw the pension funding gap widen in 2004, pushing liabilities up by 15.9 per cent - more than enough to wipe out a better-than-expected 10.4 per cent growth in stock market assets. And, despite the 10.4 per cent advance last year, Mr Geraghty said managed pensions funds lost 0.6 per cent a year on average over the past five years before allowing for inflation.

The head of Mercer Investment Consulting in Ireland, Mr Tom Murphy, said activity on the liabilities side of the pension equation would be a key theme for the pensions industry in the future.

Turning to stock market performance, Mr Des Sullivan, the chief investment office of Perpetual Trustees, said equity returns were back to normal and were unlikely to return to the halcyon days of the late 1990s. Cashflow and dividends would be the key drivers for equity returns in the year ahead, and stock-picking would become more important than ever.

Successful stock-picking was seen as the key factor in Irish fund manager performance last year, Mercer senior consultant Ms Grainne Alexander said.

Irish Life was the top performer among managed funds for the second year in a row - largely on the back of its stock selection in the booming Irish market, which rose 29 per cent last year. At the other end of the spectrum, KBC Asset Management suffered as a result of poor stock selection in the Irish, European and US markets.