The recovery in equity markets in 2004 has done little to fill the black hole in pension funds as liabilities are growing faster than assets, investment experts warned today.
Delegates at a conference organised by Mercer Investment Consultants were also told today that the majority of Irish fund managers failed to beat the returns of international stock market indices in 2004 and underperformed passively managed funds.
Mr Tom Murphy, head of Mercer in Ireland, blamed the poor performance on Irish fund managers' preference for large blue-chip companies while the recovery in equity markets has been largely driven by smaller companies.
Mr Murphy described the performance as "disappointing" for pension plan trustees as they are paying significant fees to their managers to outperform market indices.
Irish Life, with a return of 31.3 per cent, was the only Irish manager to outperform the ISEQ which gained 29.1 per cent in 2004. A combination of poor stock selection on international markets, an underweighting in Elan and the growth of "manager of manager" funds were also mentioned as factors in the disappointing performance.
Mr Murphy went to warn that despite the average Irish pension fund returning 10.4 per cent in 2004 the effect of historically low bond yields means that companies will show even greater deficits in their balance sheets at year-end.
The liabilities of pension funds are valued by actuaries by discounting the present value of long-term interest rates. As bond yields fall, as they have in recent years, the present value of these liabilities rises.
While the average fund returned 10.4 per cent in 2004, liabilities grew by 15 per cent widening the funding gap. The average pension fund is now only able to pay 70 per cent of its liabilities at current valuations.
Mr Murphy advised trustees to pay particular attention to the liability profile of their funds as this area receives less coverage than asset growth but is as important.
Mr Richard Williams, chief investment officer at fixed income manager, Fischer Francis Trees & Watts, advised investors to look for inflation-linked, long-dated bonds to counteract low bond yields.
Mr Des Sullivan, chief investment officer of Perpetual Trustees forecast that income growth from dividends is back in vogue. Investor should target cash rich companies willing to pay out in higher dividend rather tha gamble on capital growth, Mr Sullivan said.