The world's pot of retirement money shrank dramatically last year, knocking some $1,400 billion ($1,323 billion) off its value and pushing some pension funds to the brink of financial disaster.
A 10-year study, published this week by Watson Wyatt, the international investment consultancy, found that "horrendous" markets over the past three years wiped out the fortune accumulated since 1997: $2,700 billion of assets.
Mr Roger Urwin, global head of Watson Wyatt's investment business, said last year's balance sheet losses were worse than anything seen before - even during the bleak mid-1970s.
He warned that last year's fall in assets, combined with the rising value of pension fund liabilities caused by tumbling bond yields, had created a $2,500 billion hole in the global balance sheet position of pension funds. This amounted to a drop of more than 20 per cent. But Watson Wyatt, one of the world's biggest pension advisers, is cautioning against the mass closure of firms' traditional pension schemes in favour of often less generous "defined-contribution" schemes.
Mr Urwin said: "I've yet to be convinced that defined-contribution schemes can deliver adequate benefits and good security for every workforce."
He warned of situations where firms select defined-contribution schemes that fail to deliver expected benefits to pensioners.
The survey showed the world's pension fund industry suffered its single biggest drop in assets in 10 years last year - falling 11 per cent. This compares with falls of 7 per cent in 2001 and 3 per cent in 2000. Before this, it had risen each year from 1992 - when Watson Wyatt started tracking the world's pension fund assets - to 1999. It reached a peak of $13,485 billion - more than double the $6,161 billion recorded seven years earlier.
By the end of last year, pension fund assets were $10,800 billion.
Mr Urwin said some countries had been left with a significant pension shortfall. "Some do not have a big enough store of personal wealth to meet their demographic challenge," he said.
In France, the accumulated pension assets amounted to just 6 per cent of gross domestic product, says Watson Wyatt. Germany's pension assets amounted to 10 per cent of GDP. Others facing difficulties include Hong Kong and Ireland. Only the Netherlands and Switzerland have pension fund assets greater than their GDP.
In the US, the decline in assets was $900 billion. But it remains the world's largest pension fund market, with more than $6,000 billion of assets: about 56 per cent of the total.
In the UK, pension fund assets fell to $934 billion, amounting to about 66 per cent of GDP. In 1999, the assets had risen to $1,400 billion, almost 100 per cent of GDP.
But Mr Urwin, whose firm advises half the FTSE 100 firms on pension funds, warned against rushing to close the traditional defined-benefit final salary schemes.
Firms that have already closed their traditional schemes to new members include Marks & Spencer, British Airways, Abbey National, Dixons and WH Smith. Last year, more than 80 traditional final-salary schemes were closed to new entrants. Watson Wyatt is expecting markets to pick up this year.
Mr Urwin said: "The most likely outcome over the next 10 years is equity returns of about 8 per cent per year. But we wouldn't be at all surprised if we see a higher percentage over the next 12 months." - (Financial Times Service)
