Global pension fund assets have slipped back to 1997 levels after losing US$2.7 trillion since their peak in 1999, according to pension consultant Watson Wyatt.
'In the three-year run-up to 2002 we have seen some pretty atrocious conditions in equity markets . . . pension fund assets have continued to fall,' said principal investment consultant Conwell Tam.
Assets in 11 key markets grew 75 per cent in 10 years, according to Watson Wyatt analysis, meaning a rise in asset values from US$6.2 trillion in 1992 to about US$10.8 trillion last year. This is down from a peak of US$13.5 trillion in 1999.
Hong Kong, Australia, Canada, Germany, France, Ireland, Japan, the Netherlands, Switzerland, Britain and the United States make up 95 per cent of the global assets in self-administered pension funds.
In Hong Kong, the figures include the 5,303 MPF-exempt Occupational Retirement Scheme Ordinance pension schemes which have 569,171 members, according to figures from the Mandatory Provident Fund Association. A further 1.8 million employees are covered by the MPF. Of the non-MPF schemes, 90 per cent are 'defined contribution' with the remainder based on 'defined benefits' - where schemes pledge to pay out members according to a defined formula, irrespective of market performance.
Ms Tam said the troubled equity markets had prompted a revision of asset allocations worldwide.
'Many funds worldwide are facing some difficult decisions right now. A lot of returns have been quite poor,' Ms Tam said. 'We have seen increasing contributions of late, both in Hong Kong and worldwide. But just raising their contributions will [not] be adequate to meet the challenges funds are facing. They also need to look at changing their investment strategy.'
Although global asset allocations remain different, Watson Wyatt said there had been a convergence in recent years.
'Most markets that are more equity-biased have moved more into bonds while bond-biased markets have been increasing their equity weightings over the past few years,' Ms Tam said.
Hong Kong, Britain and Ireland have an equity bias while Canada and some European countries have traditionally been more weighted in bonds. Most markets also display a home bias in equity investments, typically investing about 60 per cent of their equity allocations in their local markets. In Hong Kong, the figure was only about 40 per cent and had been decreasing due to a de-correlation between salary inflation and stock market performance.
Despite adjustments, some funds were technically insolvent - particularly defined-benefit schemes in equity-biased markets. They did not have 100 per cent of assets to meet 100 per cent of liabilities, meaning companies would have to inject money to meet outstanding liabilities.
Companies abroad and in Hong Kong were increasingly looking to convert from defined benefit to defined contribution schemes, which allowed for better planning. Some employers were also considering phasing out investment guarantees. Despite this trend, many companies remained committed to their current schemes due to their ability to attract and retain top talent, Ms Tam said.
Focus on Funds, page 8