Analysts are wary of reading too much into a good 2003 pension result, writes Dominic Coyle

Crisis, what crisis? might well have been the cry this week, as pension funds left two dire years of investment returns behind them

Irish funds reported average gains of 12.6 per cent in 2003, as global stock markets shrugged off the last vestiges of a crash fuelled by the burstingof the technology bubble, the September 11th attacks in the US and the corporate governance scandal sparked by accounting fraud at Enron.

But while pension managers and analysts concede the performance has gone some way to undoing some of the damage of previous years, they are wary of reading too much into the figures.

"It's been a welcome reprieve," said Mr Tom Geraghty, senior investment consultant at Mercers, "but it is only one piece in the equation."

Pension funds have been battling a "double whammy" of falling stock markets that reduced the value of their assets, which are largely invested in equities and historically low bond yields, which effectively raise the cost of funding pension payments and therefore increase their liabilities.

"Good as 2003 was, it should not be mistaken as a fix for all the issues affecting funds, that have lost a large portion of their value," Mr Geraghty said. "We are going to need to see continued moderate returns going forward."

Mr Gerry Keenan is director of investment development at Irish Life Investment Managers, which topped the performance league last year with a return of 14.9 per cent.

He agrees companies have more to do to but will draw much comfort from last year.

"If you take a company which might have had a 20 per cent shortfall in its pension fund at the start of last year, the 2003 performance should halve that problem," he said.

"It doesn't solve the problem but it does take the immediate pressure off."

Many companies have also taken steps themselves to address the holes in their funds, either increasing theirn own and/ or employee contributions or reducing the benefits on offer and therefore the cost.

In addition, the Pensions Board has introduced some leeway for companies in meeting their funding requirements.

Companies can now submit plans that will allow them 10 years to fully fund their pension liabilities.

Finally, interest rates have hit bottom even if it seems increasingly unlikely that they will rise sharply in the near future.

The US Federal Reserve indicated clearly at the weekend that it did not see rates moving up imminently despite the growing strength of the US economic recovery. It has turned its focus on "resource use" - which measures the pressure of economic growth on capacity or employment.

On this measure it does not see economic growth as an issue. Irish Life's Mr Keenan does not anticipate any rise in US rates until the latter part of the year and expects the European Central Bank will also adopt a wait-and- see approach.

Mercer says its cautious projection is for growth of between 8 and 8.5 per cent on the equity side with a 5 per cent rise in the value of bonds, figures that are broadly reflected byIrish Life.

Hibernian Investment Managers, which have ranked mid-table on pension performance in recent years, expects stocks markets to continues ot produce strong returns, at least in the first half of the year.

With a presidential election in the United States in November, Mr Martin Nolan, managing director at Hibernian Investment Managers, also expects to see plenty of money pushed into the US economy.

He is also optimistic about the outlook for the dollar, which knocked some of the gloss of Irish funds last year.

"We would have been hedged against the dollar until recent weeks but we think the big moves in the exchange rate have now taken place and are no longer hedging," he said.

On the downside, Mr Patrick Burke, of the Irish Association of Pension Funds, warns that benchmarking is going to push up wage inflation, adding to pressure on pension fund liabilities.

"The fact is that the pension deficit was sgrowing in both directions - assets and liabilities - and that is not seen as something that will change dramatically in the short term," he said.