After the relatively quiet period in financial markets since the credit crisis hit in 2008, we have seen a very bad run in the second half of 2011 and for many funds the water has come above chest level and for some above their heads. The biggest contributor to this negative development has been the decreasing interest rate level in Northern Europe and rising rates in South Europe both which are driven by the same debt problems in especially but not only South Europe. This will have driven down the funded status of pension funds depending on the country and how much interest rate hedging was in place by some 10 to 20%. Investment markets have not been great though not disastrous. Many funds will be ending the year around zero or with a small positive, which clearly is not enough as liabilities will have gone up with one year more service cost.

Europe is having a big political crisis as well. Politicians in leading positions seem only capable to come to solutions and agreements when forced by financial markets and after a lot of damage has happened. Only when one can show there is no other option anymore they move ahead. This has led to unprecedented spreads within the European government bond arena, which indeed has become a kind of Greek or Roman arena.

Multinationals may argue, Europe is not having its act together so why should we keep on looking at a European structure for my pensions. Clearly when it is not certain that the Euro will still be there or with massive underfunding one has other things to worry about and everybody is fighting their own battle. But I would say exactly in this situation multinationals with funds in many different countries in the EU / Eurozone should be paying attention to risk management in a coherent way with maximum effectiveness. Expertise and knowledge how to do this should be focused and concentrated and be applicable for more than one situation in one particular country. It is the right time to put your forces together and create Centers of Excellence that work for all funds in close consultation with corporate sponsors who have to start filling gaps at some point. All this is very delicate from a governance point of view and needs to be treated with great care for local Trustee Board remain fully responsible. But they can be better off in a greater structure helping them with their issues.

More about the way to approach this in my next column beginning of 2012. In the meantime I would like to wish you more than ever Merry Christmas and a Happy New Year !

William van Ettinger