Typical Irish pension funds will make investment returns of less than 6 per cent in 2005, a new survey by Mercer Investment Consulting suggests.

The survey of 55 European institutional investment managers' predictions for the year ahead shows that managers expect European equities to give investors average returns of 7 per cent in 2005, while European bonds are expected to generate returns of 3 per cent.

Given the structure of most Irish pension funds, this implies overall returns of less than 6 per cent, according to Mr Tom Murphy, head of Mercer Investment Consulting.

The moderate expectations for mainstream equities and bonds mean that hedge funds are expected to be a big growth area for pensions investment in 2005.

"While we welcome greater emphasis on focused fund management and performance-related fees, the question is whether hedge funds will improve on their distinctly lacklustre performance in 2004," Mr Murphy said.

Institutional investment managers surveyed expect Japan to be the best-performing equity market, while the US equity market is viewed as over-valued.