U.S. pension funds, having suffered near-catastrophic losses in 2008, are moving away from the stock market and towards the purchase of bonds, according to a study released this week. The Milliman Study of defined benefit pension plans predicted that pension asset allocation would shift back slightly towards equity following last year’s Wall Street crash, but would never again reach the record levels experienced before the credit crisis.
Allocation of pension fund assets towards equity structures reached record levels in 2006, with 60 percent allocation, though this figure had fallen to 44 percent by the end of 2008. The culprit for this shift, of course, is the increased volatility of the stock market, which has scared institutional investors such as pension funds back to the less risky investments offered by bonds.
Pension allocation for bonds was only 30 percent when equity allocation was at its highest. That figure had increased to 41 percent by the end of last year.
Milliman’s John Erhardt, and the main author of the report, predicted that equity allocation would rise to about 50 percent by the end of the year, but “[didn’t] expect that we’ll ever see 60 percent equity allocations” again.
Asset returns for the largest 100 corporate pension plans were negative 18.9 percent for 2008, resulting in a $300 billion loss. Milliman predicts a rise in pension funding in 2009 to make up for the loss.