Eton Park dips toes in UK pension fund management market

As a US hedge fund backs a firm looking to manage UK defined benefit pension fund schemes, a US report notes recent good performance of US defined benefit schemes belies the fact many may be ripe for closure

The move comes as research from Greenwich Associates finds while funding ratios of US pension plans improved in 2005, and “even with several important factors working in their favor,” investment performance “failed to meet the expectations of defined benefit plan sponsors, many of which appear to be shoring up their plans with an eye toward eventually winding them down.”

Greenwich Associates cited relatively strong market returns and a “slight upward move” in interest rates for an increase in average funding and solvency ratios for corporate and public pension funds, and propulsion of endowment assets by 7.7%.

However the research house added, “these improvements did little to allay concerns about the long-term health of US defined benefit plans.

“Rather, the results of 2005 provide a clear demonstration of plan sponsors’ need to wring ever higher levels of return out of their investment portfolios.”

The bleak comments came from Greenwich Associates’ 2005 Investment Management Research, for which 1,050 US institutional investors, including 580 corporate pension plan sponsors, 225 public plan sponsors, and 214 endowments were interviewed.

“The strategies that plan sponsors are adopting are well thought out and appropriate, including increased investment in international stocks and certain alternative asset classes, and the growing use of absolute return and portable alpha strategies,” says Greenwich Associates consultant Dev Clifford.

“But thinking that shifting assets from US equities into these products will enable defined benefit plan sponsors to fund the bulk of their looming pension obligations through investment returns might be a case of hope triumphing over experience.

“What we might instead be witnessing is an effort on the part of corporate plan sponsors to get their pension houses in order before winding them down.”

The typical large US defined benefits plan saw the funding ratio on its accumulated benefit obligations increase from 95% at the start of 2004 to 99% at the beginning of 2005. Funding of projected benefit obligations rose from 88% to 91%.

Over the same period, the average solvency ratio of public DB plans increased from 87% to 89%, the study found.

Greenwich Associates consultant Rodger Smith cautions, however, “the improvement in pensions’ health should not be overstated. Nearly a quarter of corporate defined benefit funds still have projected benefit obligations funded less than 85%.”

The proportion of US corporate defined benefit plans closed to new employees increased from 19% in 2004 to 22%, and the largest plans appear to be closing at an accelerating rate, Greenwich said.

“The percentage of funds with assets of more than $5bn that are closed to new employees increased from 13% in 2003 to 22% in 2005”, says Greenwich Associates consultant William Wechsler.

“That said, pension plan sponsors are taking several ambitious steps to improve their funding situations, including shifting assets into international equities and alternative asset classes including hedge funds, equity real estate, and private equity.”