Schemes should be in a healthier position in 10 years’ time, thanks to performance by growth assets and cheaper liabilities, says J.P. Morgan Asset Management

In 10 years’ time, schemes could find their funding deficits have fallen by up to 20% through a combination of a 40% allocation to growth assets in their portfolio and reduced liability levels, according to the latest long-term capital market assumptions outlook from J.P. Morgan Asset Management (JPMAM). 


An equity-heavy growth portfolio is expected to beat long duration fixed rate liabilities by more than 5% a year, when valued in euros, pounds or dollars, the research found.

According to JPMAM’s forecasts, expected equity and credit risk premiums have increased since last year, while returns on private equity and emerging markets suggest now might be a good time to enter those asset classes.

US large cap equities are expected to deliver compound annual returns of 7% over a 10 to 15 year timeframe, denominated in local currency, given companies sell their products into emerging markets where growth is faster than in developed markets. European large cap equities are forecast to deliver the same return.

Japanese large caps are forecast to deliver a lower total return of 5.75%, a conservative estimate given the difficulty of forecasting the impact of domestic policy changes on the profitability of Japanese firms vis-à-vis US and European companies, said Patrik Schowitz, global strategist for multi-asset solutions at JPMAM.

Emerging market equities are meanwhile expected to generate the highest total return of 9.75%, a slight increase on last year’s 9.5% due to currency fluctuations.

Within fixed income, US high yield seems the most attractive sub asset class, with an expected return of 6.75%, compared to returns of 3% on US government bonds, 4% on UK government bonds, and 1.75% on European government bonds, said JPMAM’s analysts.

Not only is this good news for pension funds allocated to growth assets, but the status of their liabilities is also set to improve, said Rupert Brindley, Managing Director of Global Pension Solutions at J.P. Morgan Asset Management.

This is because long-dated pension liabilities are valued using long-dated bond yields. In other words, they are marked-to-market as though they were bond-like obligations. If JPMAM’s forecast about the path of normalisation of bond yields is accurate, then long-term yields will rise sharply over the next five years.

“This will be a major relief to pension schemes, since their liabilities will mirror the sell-off in long bonds, while their assets will have performed significantly better,” said Brindley.

The overall effect of this is that a 40% growth allocation within a typical pension scheme’s portfolio might be enough to see its funding deficit fall by up to 20% within 10 years, without schemes needing to re-risk, he added.