Peter Collins of Falcon International Estates discusses the growing shortfall in UK pensions

February 09, 2012 (PRLEAP.COM) Business News
Christopher Ailman, chief investment officer of the California State Teachers' Retirement System put it best when he said: "What we saw as an asset before, now we see as a liability." As a result pension fund managers are finding it increasingly hard to generate the profits required for fund holders through traditional stock portfolios with a typical 65 year-old retired individual left with a private pension paying out a meagre GBP 7666 per year. The Government recommends that a private pension should be paying a minimum of GBP 14,400 per year to maintain an adequate living standard for a pensioner, meaning that few funds are generating the returns required. Pension funds with a high percentage of fund holding in private equity firms have fared particularly badly.

Because of this many fund managers are turning to alternative investments to make up the shortfall. It is estimated that over USD 1 trillion (GBP 626 billion) was invested in stock alternatives such as property over the past twelve months. US researchers also report a 5% increase in alternative investments by pension fund managers, now up to 42% of placements.

Reporting on the pension shortfall crisis, employee benefits company Aon demonstrate the effect the economic crisis has had on pension funds with a number of projections. Their calculations reveal that stock market losses in a single month last year resulted in £518 being wiped off the projected pension income of a person aged 30, and £358 off that of a 60-year-old.

The fact that stock markets have fallen sharply in recent months simply serves to highlight the inherent risks associated with stock-based pension funds. The ongoing market pessimism is also a key concern. Longer-term market threats such as the spectre of Eurozone loan defaults, the very real danger of a global double-dip recession and questions over American credit worthiness will also keep world markets in a state of flux, doing little to increase trader confidence and thus keeping portfolios depressed for the foreseeable future.

To combat the damage caused to a fund by volatile markets, funds are making increased use of non-stock options with property proving to be of great interest. Relative stability in value and the historical upward trend of land values make this an attractive way of retaining fund value whilst using stock trading techniques for short-term gains. The Financial Times reported in July that alternative assets managed on behalf of pension funds grew year on year by 16% to a total of USD 925 billion dollars; a figure expected to rise again by this time next year. The trend away from equity-focused portfolios means that alternative assets now account for 19% of all pension fund assets globally. 15 years ago alternative assets accounted for a mere 5% of pension fund assets.

Deeper analysis by industry analysts Towers Watson found that of these alternative assets, 55% were real estate based. These property-based assets are focusing heavily on the Asia-Pacific region with holdings doubling from 7% in 2009 to 14% of the total in 2010. European property investment makes up 35% of the remaining holdings and the USA a further 46%.

Concluding the Towers Watson research, Craig Baker, global head of research said: "The case for diversity has been thoroughly tested recently, but those investors that had diversified away from simply holding equities as their main growth asset in the last five years generally performed better than those that hadn't. Given the ongoing economic uncertainty it is likely diversity will become even more important in the future. While in some cases this could lead to a requirement for higher governance, we think the effort to diversify is worthwhile; while not forgetting the increasing number of lower governance routes to diversity in the market."

The evidence suggests that pension fund managers are now actively choosing to eschew the uncertainty of equity based funds in favour of longer term asset based investments. The global trend towards rising property prices is starting to form the basis upon which many funds are built helping to ensure growth regardless of negative global market activity.