LCP Investment Summary
6 January 2012

2011 Market Commentary

2011 was another volatile year for markets. The Eurozone Sovereign Debt crisis dominated the headlines. While the first half of the year started positively, the equity markets fell sharply in August and September as investors feared that the slow reaction of Eurozone politicians could risk the breakup of the Euro. However, in the last six weeks of the year the global equity market rallied strongly on hopes that new measures from the ECB would resolve the current impasse. Despite this late rally, it was not enough to offset the weakness during the summer and the FTSE World Index finished the year down 3.4%, primarily due to weaker Eurozone equities (which fell by 14.5% in 2011).

The AAA Eurozone bond market outperformed equities as bond yields fell sharply across the stronger core economies of the Eurozone. A portfolio of AAA rated bonds increased in value by 9.1% as investors sold their Italian and Spanish bonds and bought German and Dutch bonds due to their perceived safe haven status. French bonds also had a positive return for the year. However, they underperformed other AAA bonds as investors feared that France might lose its AAA status in 2012. Italian bond prices fell sharply over 2011 as fears about the sustainably of Italian debt levels increased.

Defined Benefit Schemes

We have illustrated below the asset values and liabilities of a sample defined benefit pension scheme in 2011. The scheme is a reasonably mature defined benefit scheme with active, deferred and pensioner liabilities. The assets are invested in a mix of global equities, bonds, diversified growth funds and cash.

The funding level of this sample defined benefit scheme fell by just over 6% during the year.

The assets of the sample scheme increased in value over the year by 2.7% as the decrease in the value of equities was more than offset by an increase in the value of bonds.

Liabilities (using a minimum funding standard proxy) increased by 9.6%, mainly due to the sharp decrease in German bond yields during the second half of the year.

The graph below illustrates how the assets, liabilities and the funding level of our sample defined benefit scheme progressed over the last 12 months.

InvGraph1

The funding level (ratio of assets to liabilities) remained broadly stable until June when a combination of falling asset values and falling German bond yields resulted in a sharp fall in the funding level.

Defined Contribution Schemes

We have illustrated below how a range of sample defined contribution (DC) schemes performed in 2011. DC schemes with a high exposure to bonds performed best while schemes with a higher allocation to equities performed worst.

We have shown below the progression over the last 12 months of three sample DC pension schemes with different objectives.

InvGraph2