Pension returns 'worst in 27 years'

OCCUPATIONAL pension funds have suffered their worst spell in 27 years, according to the latest Russell/Mellon CAPS survey. Median returns slumped by 9.7% in 2001, the second successive year of falls. It is the first time returns have fallen for two years running since the oil crisis of 1973-74. But real returns over the five years to December 2001 were still positive at 3.2% a year.

The collapse in share prices was responsible for the fall in pension-fund value, according to CAPS, which surveyed 1651 pension funds - mostly final-salary but also some money purchase schemes. Bond returns were positive.

The proportion of funds allocated to UK equities is at its lowest since 1983-84 at 47.4%. Instead, pension funds are flocking to invest in overseas shares, which account for 25% of funds, the highest since the late 1980s. The change in the US weighting is especially dramatic, up from 4.7% to 7.2%.

The sharp collapse in pension fund values helps explain the move by dozens of companies to end final-salary schemes and put new recruits into money purchase schemes. With final-salary schemes, the company has to make up any shortfall created by dwindling returns. With money purchase schemes, the employee gets a smaller pension.

CAPS also revealed that active fund managers - those trying to pick stock market winners - outclassed passive fund managers. The median return from UK equities was minus 12.6%, well ahead of the FTSE All Share return, which was minus 13.3%.