Despite the first half of 2009 showing marked improvements on returns for pension schemes globally compared to the huge losses in 2008, structural challenges remain, reports the Organisation for Economic Co-operation and Development (OECD).

While investment returns and funding ratios in defined benefit (DB) plans across the globe have improved, with an average recovery of USD 1.5trn, this is only a small dent in the USD 5.4trn lost in market value in 2008.

With some countries working towards recouping these losses, the ongoing shift towards defined contribution (DC) must be addressed with an overhaul of regulatory approaches, said André Laboul, head of the financial affairs division and directorate of financial and enterprise affairs, at the OECD, in his statement in the latest Pension Markets in Focus.

Default investment options which are able to deliver risk mitigation for members approaching retirement, and the implementation of effective financial education programmes, are elements the OECD continues to work towards, and will publish reports and policy recommendations throughout 2010.

The OECD's roundup of the first half of 2009 and the effects of 2008's market losses shows that the average return for OECD pension funds in 2008 was -24.1 per cent in real terms, and by 30 June 2009 pension fund assets were on average 14 per cent below December 2007 levels.

Norway and Turkey were the best performing pension funds, with nominal returns of over ten per cent, while the Australian superannuation funds, which some industry experts say the UK should look towards when it comes to its DC arrangements, returned only one per cent.

Equity exposure was a huge factor in the returns experienced across Europe, with Ireland's exposure to equities in 2009 at 52 per cent of total assets, and the UK at 46 per cent. This was, however, more conservative than 2007 levels, when Ireland dedicated 66 per cent of portfolios to equities.

Changes were also seen in 2008 to strategic asset allocations, with the UK and the Netherlands showing increased evidence of reducing their target allocation to listed equities. However, over the past decade both DB and DC have shown trends of increased international diversification of equity portfolios, increased use of derivatives to hedge both asset and liability risks, and the continued exposure to alternative asset classes, such as hedge funds, private equity and infrastructure. The Netherlands shows the highest exposure to international assets, as well as Iceland, Hungary and Switzerland.

Meanwhile, public pension reserve funds (PPRFs) are expected to play a major role in the financing of public pension systems in the future, as a way of alleviating the impact that ageing populations will have on public finances. Sweden accumulated a large PPRF in 2008, and in terms of total assets relative to the national economy, showed a ratio of 23.5 per cent.

PPRFs where equities represent a large part of the total assets invested demonstrated poor returns in 2008, with Ireland the worst hit at -30 per cent in nominal terms. Norway and France also suffered, with returns of around -25 per cent. And in a demonstration of the poor results across the country, Ireland's parliament approved the use of 25 per cent of the reserve fund's assets to recapitalise failed domestic banks. More conservative countries, such as Spain, showed positive returns as they were fully invested in bonds in 2008.

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