U.S. Pensions Slash Expectations For Returns, Bank On P.E.

Feb 6 2009 | 12:01am ET

U.S. pension funds are projecting sharply reduced investment returns from major asset classes, including alternatives, through 2013, according to new research from Greenwich Associates.

Overall, more than 1,000 U.S. corporate pension funds interviewed from July to October 2008 said they had reduced investment returns on plan assets to an annual 7.4% in 2008 from 8.2% in 2007, and public funds cut their overall portfolio return expectations to 7.6% from 8.5%.

Both groups expected private equity to generate the highest returns of any asset class over the next five years, with public funds projecting an annual 11.3% return from their private equity investments and corporate funds expecting 10.1%. “It is important to remember the extent to which markets have deteriorated since these interviews were completed in September,” says Greenwich consultant Dev Clifford. “If anything, these expectations for private equity and other asset classes might prove overly optimistic.”

Pension funds have dramatically reduced return expectations for U.S. equities, with projections for annual rates of return dropping to 7.8% in 2008 from 8.6% in 2007 among corporate plans and to 7.9% from 9.1% among public plans. Both groups also cut return expectations on fixed income and pension funds also reported substantial reductions in expected returns on international equity, equity real estate, private equity and hedge funds.

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