GLOBAL - Corporate pension plans in the Eurozone and the UK recorded a massive 46% drop in funded status since 2000 - the largest fall among the world's major retirement markets, according to new research.
Japan, the US, Australia and Canada followed with culminative declines of -43%, -42%, -29% and -26% respectively.
Fluctuations in global stocks and bond markets continued to take their toll on funding levels during the first quarter of 2003 also. This time the UK registered the largest fall of 10%, followed by the Eurozone (-7%), the US (-7%), Japan (-5%), Australia (-5%) and Canada (-2%).
Given these results for the first quarter this year and the continuing declines in funded status, companies must analyse the impact on their global pension plan and take prudent action on cash requirements and pension expense, said Leon Potgieter, principal and head of Towers Perrin Global Consulting Group, who carried out the research entitled ‘Towers Perrin Global Capital Market Update: First Quarter 2003 Results’.
The report explained that the impact of capital markets on these pension plans is twofold: on fund assets as a direct result of investment performance and on plan liabilities through the effect of changes in interest rates on economic assumptions.
In the Eurozone, minor gains in bond markets were overshadowed during Q1 by negative returns in Eurozone equities resulting in overall losses. Bond yields also continued their decline over the first three months, which has in turn led to another decrease in the benchmark discount rate, resulting in an increase in liability.
In the UK, bonds experienced a small return of 0.2% for the quarter, while equities experienced negative returns. Although long-term government bonds increased seven basis points, all other bonds decreased, which led to a lowering of the benchmark discount rate.
Since the middle of March, we've seen encouraging signs of improvement in global capital markets, notably in the benchmark stock indices. This has helped increase the value of pension plan assets, said Steve Kerstein, managing director of Towers Perrin's global retirement consulting practice.
However, it's a mixed picture. Interest rates since the end of the first quarter have moved lower, and this is dampening pension plan performance because it requires employers to increase their estimates of plan liabilities. The fact that interest rates around the world are at such extraordinarily low levels remains a big issue with many large employers, especially when plans are underfunded and therefore the liability changes outweigh the asset changes.
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