A new report by US-based research house Greenwich Associates, revealed that a combination of strong returns from equity markets, positive net contributions and rising interest rates had led to an improvement in funding and solvency ratios.
However, nearly a quarter of corporate defined benefit pension funds still have projected benefit obligations which are less than 85 per cent funded.
The report noted that pension plan sponsors were taking “ambitious steps” to improve their funding levels, including shifting assets into international equities and alternative asset classes such as hedge funds, real estate and private equity.
Over the last five years, investment in private equity has increased from 38 per cent to 41 per cent while allocations to equity real estate have jumped from 38 per cent to 47 per cent.
On average, US pension plans and endowments expected returns of 9 per cent per year from international equities, 11.3 per cent from private equity and 8.1 per cent from hedge funds over the next five years.
This compared with 8.1 per cent per annum from US equities and 5.1 per cent from fixed income.
But Greenwich said it would be over-optimistic of any plan sponsor to think that the returns from international stocks and private equity would solve their funding problems.
Greenwich consultant, Chris McNickle, commented: “ Based on the series of announcements from large companies – some with healthy pension plans – that they are closing their schemes to new members or freezing the plan altogether while turbo-charging their defined contribution structures, it is not a stretch to assume that in some cases, these alpha-generating strategies are being implemented by plan sponsors to shore up their schemes in advance of a similar move.”
HS
