Pension fund performance in the UK was positive for a second straight year with a 10% increase, research has indicated, however a UK law firm believes that 2005 will not be all roses for the pensions market.
According to research firm Russell/Mellon pension fund returns have been put back in the black over a three-year period, with an estimated weighted average of 3.6% per annum, ahead of inflation at an estimated 2.9% per annum.
The company looked at 664 funds worth a total of £171bn.
Equity markets backed up the good performance with UK equities returning 12.8%, while Europe ex-UK (13.4%), and emerging markets (17.1%) also did well.
In terms of sectors, property was the best performer with a total return of 16.2%, while index-linked gilts returned 8.5%.
UK gilts (6.6%), overseas bonds (2.4%) and cash (4.3%) also did well.
Daniel Hall, publications and statistics manager at Russell/Mellon says that a second year of positive returns bodes well for pension funds following three previous years going the other way.
“Based on weighted average performance, a fund worth £100m on 31 December 1999 would have lost around £21m by the end of 2002. The turnaround in the markets since then however, has meant that the same fund would now have clawed back all of its losses,” he said.
In contrast, UK commercial law firm, Wedlake Bell believes that Government proposals to add new pension obligations onto struggling businesses sold to new owners might do more harm than good.
Under government proposals, set to come into force in April, employees transferred to a new employer will have extended rights whereby new employers will be forced to provide access to a defined benefit scheme or match the employee’s payments into a defined contribution scheme up to six percent of that workers salary.
Wedlake Bell says that this ‘may put off potential purchasers and increase the chances of the business being driven into bankruptcy’.
The company also criticises the figure of six percent as being too high, which could well lead to what it calls a two-tier workforce with new employees earning more than existing employees.
Jane Wolstenholme partner at Wedlake Bell says: “Six percent may not seem high for FTSE-100 companies but we suspect it is far above the all company average – typically three to four percent.”
Similarly, Deloitte & Touche suggested last week that FTSE 100 stocks would have to rise another 30% from current highs just to cover the deficit in final salary schemes operated by relevant companies.
That shortfall was outlined in an IFAonline article, with suggestions of a £65bn shortfall in funding by the biggest 100 listed companies in the UK at the end of 2004.IFAonline
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