Private funds have made up nearly half of the hit they took in the market nightmare of 2008, the Organisation for Economic Cooperation and Development says on the basis of sample data for December 2009.
This means that at the end of last year, private investment funds had assets totalling 16.8 trillion dollars (13.0 trillion euros).
By way of comparison this is bigger than total US gross domestic product last year, which was 14.25 trillion dollars according to World Bank data, substantially more than eurozone GDP of 12.455 trillion dollars. Total world output in 2009 was 58.133 trillion dollars.
The market crash in 2008 cut OECD private pension fund values by 3.5 trillion dollars. By December, a stocks rally had retrieved about 1.5 trillion dollars of this but the boost has petered out.
“Anecdotal evidence shows that pressure ... to raise returns is driving a move into alternative investments with pension funds increasingly using derivatives to hedge risks and as an alternative to direct investment in the underlying markets.”
This trend “by pension funds into hedge funds and other alternative instruments as well as a growing appetite for derivatives” was likely to continue, it said in remarks which may be seen as ironic just as many governments tighten the noose around such activities, much vilified during the financial crisis.
Private funds earned a return averaging 6.6 percent last year but at the end of the year the assets they owned were still worth 9.0 percent less than at the end of 2007.
Many public pension reserve funds underpinning social security systems had almost recovered at the end of last year to where they were at the end of 2007 before the crisis really took hold.
In contrast to the size of private funds, the data shows that the total of reserve funds to back-up public pensions in the OECD area was 4.5 trillion dollars at the end of last year.
This public reserve figure rose by 7.3 percent from the level at the end of 2008 and 13.9 percent from the total in 2007.
These are some of the conclusions of an OECD analysis published this week that offers important insights into how the money of people with pension entitlements performed during the economic crisis and what the outlook is during recovery and beyond, towards retirement day.
“This is not a pessimistic or alarmist report,” one of the main authors Jean-Marc Salou of the OECD’s financial affairs division told AFP. “There are signs of recovery.”
The value of both private and state pension reserves rallied when stocks recovered strongly last year, but pension investment overall is weighted towards government bonds.
State schemes generally, being more vested in conservative instruments such as government bonds, suffered less on the way down and by the end of last year had recovered their losses.
There are signs of an industry-wide further move from stocks toward bonds as a result of the crisis, but this is in parallel with evidence of increased use of hedge funds, derivative instruments and alternative assets.
Salou said that these signs should be treated with some caution since it was not yet clear which types of hedging and derivatives were being favoured.
The recovery of pension funds is faltering in line with nervousness on stock markets. In addition, uncertainty over weak sovereign debt markets is a factor among new challenges.
However, private funds are broadly well placed relative to long-term liabilities although there was a balance sheet funding gap of 26 percent at the end of last year, and one measure for Japan showed a shortfall of about 45 percent.
In the OECD area, pension fund assets rose on average to the equivalent of 67.1 percent of gross domestic product last year from 60.3 percent in 2008.
However, about 60 percent of OECD pension assets are in funds of stock market listed companies that guarantee an amount of pension payment and some of the funding levels in such corporate pension schemes “remain very low in some OECD countries.”
The report barely refers to the sensitive subject of radical reforms to ensure long-term solvency of state pensions schemes, which are pivotal in many countries to the overall outlook for the structure of pensions.
Overall, the facts, figures and some surprises paint a mixed picture of a global industry, which is based mainly in advanced economies.
The report warns: “As pension funds heal their wounds from the financial crisis, new challenges are appearing: the onset of retirement of the baby-boom generation, uncertainty over the strength of the economic recovery, and weakness of public bond markets.”
The analysis also says that new challenges arise from changes to regulations affecting solvency and accounting standards.
In countries studied that lie outside the OECD area of 31 advanced economies “pension funds apparently suffered less in 2008 and have also recovered quicker in 2009.” At the end of last year, their assets were worth more than at the end of 2007.
Some funds bought shares heavily as markets fell and then eased up as markets recovered. But in some countries, the opposite occurred and this “raises concerns over the funds’ long-term performance” as well as the role of funds as market stabilisers.
Some responded to a fall in stock prices during the crisis by increasing their holdings of state debt to reduce risk, the report says, implying they were adjusting their strategies just as alarm about government debt was about to become acute.
The report notes that many state systems invest heavily in shares, while being heavily dependent, even totally in the case of the United States and Belgium, on government debt bond markets.
It made only an indirect reference to how concern about government borrowing has overhung debt markets for the last six months, and could cut into such holdings. However, it did explain that much of the value regained as stock prices rallied had been offset by a technical factor related to government bonds.
Authorities in many countries have injected massive funds into the financial system to fight the crisis. This has pushed down the interest rate or yield on some government bonds, a vital source of income for pensions funds.
These yields are used by some funds as a measure of their obligations to pay under guaranteed final income schemes. When yields rose, their liabilities fell but now the opposite had occurred, offsetting much of the book recovery in asset values.
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