Low-gains warning in US markets has serious implications for pensions

WITH the stock market having risen over 50% in the past 12 months, warnings are being liberally made in the US that gains this year could be quite modest.

If that happens there are serious implications for Irish pensions, and indeed for all pension funds which are so heavily dependent on stock markets delivering good future returns. Since the collapse of markets from 2000, analysts warned the outlook for future stock market growth has been slashed from 12% on average to 6%.

After three years of sharp declines, markets embraced the bull run of 2003, but many in the US believe the best is already over and the US market will rise by no more than 10% in 2004. Some suggest it could be flat and add that, traditionally, presidential election years have yielded single-digit stock market growth.

Last year the S&P grew 12.1% in the fourth quarter pushing the annual return out to 28.6% against 26.8% for the ISEQ in Dublin.

In Britain the FT All Share Index rose 9.4%, giving a return in that market of just over 20% year-on-year, according to the recent update on pension fund returns from Buck Consultants, Dublin.

Because of the stock market surge, Irish pension funds did better last year than for some time. The average return for 2003 was 12.5%.

That compares with a three-year average of -5% per annum during the meltdown. Taken over a five-year period, the Irish pension funds have yielded an average return of just 1.1%, dragged down by the shake-out that started in the Nasdaq in 2000 when the high-tech bubble finally burst.

Despite the growing expectations of good growth in the US economy, analysts in the US are cautious.

This is despite the Nasdaq reaching 2,000, last seen on January 15, 2002 and the Dow Jones passing 10,000 for the first time since May 2002. Even if US interest rates stay at their 45-year-low levels for a time, they hang over the market. As the economy picks up the threat of inflation will demand higher interest rates.

That will almost certainly dampen consumer and business confidence, and halt market progress. Lower rates kept consumers spending and as they tend higher they will have the opposite effect, analysts said.