Investments 

Impact of Brexit on UK pension funds revealed

Impact of Brexit on UK pension funds revealed

UK funds were a major drag on pension returns in 2016, in what was overall a strong year for pension fund performance, figures from Moneyfacts have revealed.

The survey, which covered 5,500 Association of British Insurers-classified investment funds used by pension schemes and drawdown funds, found UK funds across all asset classes underperformed their global counterparts.

UK direct property funds lost on average 1.46 per cent of their value over 2016, while the average fund across all asset classes returned 15.74 per cent, a seven-year high. 

UK property securities funds did even worse, delivering negative growth of minus 6.58 per cent.

Global property funds, meanwhile, returned on average more than 16 per cent.

In the equity classes, UK All Companies funds returned on average 9.82 per cent, a figure that was dwarfed by the 23.5 per cent returned by global equity funds, illustrating a wider trend of underperforming UK-only funds.

UK smaller companies, meanwhile, returned 7 per cent, and UK equity income funds returned 11.27 per cent. 

UK equities were a clear drag on European equity funds. European excluding UK equities returned 15.8 per cent, but were reduced to 13.1 per cent when UK companies were included.

Of the global equity funds in the ABI sectors classifications, emerging markets did particularly well, returning 32.4 per cent, just beating the 31.3 per cent returned by North American equity funds.

Asian Pacific equities also did well, returning 27.3 per cent without Japanese companies, or 26.1 per cent including Japanese companies.

Commodity and energy funds were the survey's top performers, delivering 70.9 per cent returns over the year.

While the average return across all the 5,500 funds was 15.7 per cent, this did not necessarily have any bearing on returns enjoyed by the average UK pension scheme member.

The average automatic enrolment scheme automatically puts its members in a balanced fund with a mixture of equities and fixed interest assets.

For funds with a 20 per cent to 60 per cent weighting to equities, the average return was 10.6 per cent, while those with a 40 per cent to 85 per cent weighting to equities, returns were 13.7 per cent.

As FTAdviser revealed earlier this week, thanks to the falling value of sterling, those pension schemes that did not hedge their exposure to currency risk in their overseas holdings would have done a lot better than those that did hedge.

That was because between 23 June (the day of the European Union referendum) and 30 December, the pound lost 17 per cent of its value against the US dollar, falling from $1.48 to $1.23. 

The weakening of the pound automatically increased the value of overseas investments held in foreign currencies.

As FTAdviser reported, pensions schemes that hedged their exposure to overseas assets - such as Now: Pensions - did not benefit from the fall in the pound.

Those that did not hedge - like The People's Pension - did benefit.

The result was that Now: Pensions reported a 10.8 per cent return for the year, while The People's Pension has reported a 20.5 per cent return.