While the National Association of Pension Funds (NAPF) has maintained that the focus for pension funds remains in seeking sound long-term investing rather than reacting to short-term market fluctuations, Phil Page of Cardano gave Pension Funds Insider a sombre warning for funds

Page said that "we are already 15% down on a potential drop of 30% in equity markets that we identified last week should a full blown Eurozone crisis develop. Another 15% fall would seriously affect funding levels for pension schemes."

Page added: "It's a coming together of various problems. The downgrading of the US's credit rating is fairly minor compared to the credit worthiness and sovereign debt problems spreading from the periphery of the Eurozone to concerns about France and Germany."

He continued to say: "What we feared might happen is indeed occurring."

He added: "The long-term outlook remains relatively healthy, however, and we see a new normal scenario appearing with moderate economic growth of around two percent per year. That would hold back returns on equity markets but is better than tail events such as serious problems in Europe heavily restricting economic growth or pulling us into a double-dip recession".

"Pension funds that are basing their investing on expectations of a return to 1990s style growth may need to re-think. Lower levels of returns on equities and corporate bonds may make construction of all weather portfolios by investing in macro funds or purchasing equity derivative protection attractive."

Alex Pocock, a Barnett Waddingham associate, said that trustees should pay close attention to what risks their portfolios expose them to: "The current turmoil in sovereign debt markets has led investors, quite rightly, to review their holdings of Government debt. Global uncertainty has similarly meant that investors are reviewing their equity allocations at a regional level. Against this backdrop, it is worth reminding ourselves of the 'hidden' features of the markets we are investing in to ensure that these are not overlooked in these turbulent times."

"Looking beneath the surface of markets reveals that underlying holdings may not always be what investors were expecting. The nature of bond and equity markets is such that it is not easy to devise categorisations that will be robust in all circumstances. This leads to investors perhaps unknowingly finding they hold foreign government debt or equities of overseas companies within their UK allocations.

"Trustees should be aware of the concentrations present in and features of the markets in which they are investing. This is particularly relevant for passive investors who do not deviate from the index; an active manager, free to deviate from the benchmark, may exhibit significantly different characteristics."

First published 11.08.2011

dbillingham@wilmington.co.uk