Over three years, pension funds achieved an estimated weighted average of 14.8% p.a. This was comfortably ahead of inflation, as measured by the retail prices index (RPI), which ran at an estimated 2.8% p.a. Returns over five years to 31 December 2005 were also slightly ahead of inflation, at 3.7% p.a. against an RPI of 2.4% p.a.
The longer term saw much healthier real rates of return. Over the last 10 years, pension schemes returned an estimated 7.7% p.a. compared with 2.6% p.a. for RPI. This was also ahead of earnings inflation, which was 4.2% p.a. at 30 September 2005.
The strong performance in 2005 was driven by double-digit returns in each of the major equity markets. UK Equities remains the single biggest asset class for UK pension fund investment and achieved a market return of 22.0% over the year. Emerging Markets (49.9%), Japan (39.6%) and Pacific ex Japan (28.6%) provided the best overseas equity market returns. Europe ex UK Equities and US Equities also performed well however, returning 23.6% and 18.7% respectively.
Once again the Property sector performed well, returning an estimated 17.0%. Index-Linked Gilts (9.0%), Corporate Bonds (8.7%), UK Gilts (7.9%), Cash (4.6%) and Overseas Bonds (4.3%) also all achieved positive returns over the year.
Commenting on the results, Daniel Hall, MASâ Publications and Statistics Manager said, âBy the end of 2004, pension funds had got back to where they were at the start of the decade, in terms of fund value. This year they have finally started to move ahead.
Based on weighted average performance, a fund that was worth Â£100m at the end of 1999 would have lost around Â£21m by the end of 2002. By the end of 2005, that same fund would have bounced back and be worth Â£119m.â
At 30 September 2005, Mellon Analytical Solutionsâ UK pension fund sample consisted of 597 funds representative of 1804 separate manager portfolios with a total market value of Â£189 billion.
Mellon Analytical Solutionsâ detailed analysis of pension fund performance will be available in March.