UK pensions outperform inflation over past 50 years as Nigerian PFAs struggle

UK pension fund returns have outperformed increases in UK retail prices and wages significantly over the past 50 years, a study by UBS Global Asset Management has found.

This is in stark contrast to Nigerian Pension funds who have lagged inflation for the past 7 years as BusinessDay exclusively reported last week.
Between 1963 and 2012, the average UK fund returned slightly above 10 percent – 4.2 percentage points ahead of retail price inflation and 2.6 percentage points above wage inflation, UBS’s latest annual pension study revealed.

Ian Barnes, head of UK and Ireland at UBS GAM, says the figures show that UK defined benefit (DB) schemes had done what they were meant to do over the long term, despite facing volatile conditions.

“Essentially, the whole point of the DB pension market is to collectivise risk and to allow a population of investors to take risks that perhaps on their own they wouldn’t be comfortable taking,” he says.

The findings also support the widely held – and hotly pursued – view that equities perform better than bonds over the long term. The report showed that UK equities produced an average return of 11.8 percent annually in the 50 years to 2012.

Mike Taylor, chief executive of the £4.6 billion London Pensions Fund Authority, says his scheme, which has more than 70 percent allocated to equity-type investments, has seen returns along these lines over the past 10 years – just below 8 percent, against inflation of about 3.25 percent.

“Equities are a good long-term hedge for inflation, but the problem with equities is that they are so volatile you may not get that hedge against inflation in the medium term,” he says.
Nigerian pension funds are however consistently failing to deliver inflation adjusted returns to Retirement Savings Account (RSA) contributors, leaving them exposed to losses on assets accumulated over time.

On a real return basis (returns adjusted for inflation), the value of PFA returns have been declining while Net Asset Values (NAVs) have been growing on a nominal basis.

A working paper received by BusinessDay last week on the results of the performance of pension fund administrators from 2006 to 2014 and the impact of inflation on the RSA returns showed that RSA holders have been losing an average of 3 percent on their savings every year, for the last 7 years.

The results of the paper showed that on average, PFAs returned about 9.95 percent between years 2006 – 2014, with 2007 showing the highest rate of return (22.06%) and 2008 showing the worst rate of return (0.62%).

Inflation however stood at an average of 10.3 percent for the review period.