Despite outperforming in most major markets, the overseas exposure dragged down the overall return as the UK emerged as the best-performing global market. The inflation-beating 11.3 per cent overall return from pension fund assets still remained far short of the 16.6 per cent return from the FTSE All-share index of UK equities - this despite a rare year when fund managers outperformed the domestic index with their UK equity portfolios, recording an average 17 per cent growth.
George Urquhart of WM Company, the pension fund performance measurement group that produced the figures, said the last time pension funds outperformed was in 1992. "Taken over the last 10 years, the average UK pension fund underperformed the index by 0.5 per cent yearly. But most of that is dealing expenses."
Even so, his colleague, WM director Peter Warrington, remained determinedly optimistic. "Historically, active managers have on occasion underperformed the index. But in 1996 they have reaped handsome dividends by avoiding the poorer performing stocks in the FTSE 100 index," he said. Reflecting their more limited exposure to property and more active management, smaller funds outdid their larger brethren by 0.5 per cent.
Mr Warrington highlighted the real 9 per cent average return over last year's inflation figure of around 2 per cent as good news for pensioners and companies. It easily beat the 2 to 3 per cent real growth regarded as a good long-term return by actuaries, he said, and meant many companies could continue with pension contribution holidays.
However, institutions are turning more bearish. WM said many have taken profits in the rising markets and kept the money in cash, which has risen from 4.5 per cent to 5.8 per cent of average portfolios.
Mr Warrington said this supported the widespread belief that large markets, particularly the US and UK, are overvalued.
The WM survey covered around three-quarters of UK pension funds, some 1,400 funds. Collectively, the industry is estimated to represent a little under a third of the whole UK stock market, just behind the life insurance companies with somewhat over a third.
The figure for UK equities compares with a 23.8 per cent return in 1995 and an 18.9 per cent average return over the past 20 years. Investment in the domestic market has remained largely static at 53.8 per cent.