GLOBAL- Plunges in global capital markets during the third quarter dragged down pension funding levels even further.
Benchmark US plans were worst hit with a 16% decline in funded status, reflecting steep drops in domestic and international equities as well as a downturn in interest rates that pushed up liabilities by 6%.
According to the this latest report from investment consultancy Towers Perrin slumping stocks and bond markets in Q3 have led to reductions between 6%-17%. The firm also warned that companies risk impacting profits if the gap continues to widen.
These results show further declines in the funded levels of pension plans worldwide, said Leon Potgieter, principal and head of Towers Perrin’s Global Consulting Group.
Unless this trend is reversed, companies may be facing increased cash contributions and pension expense that could have potential balance sheet implications.
The report covered defined benefit pension plans in Australia, Canada, the Euro-zone, Japan, the UK and the US.
The report showed that portfolios worldwide posted negative returns in Q3 on a year to date basis. Asset allocation had a major impact on real returns in individual schemes given the negative equity returns and the positive fixed-income returns that generally prevailed in the markets. Liabilities, which typically moved in the opposite direction of interest rates, increased during Q3 due to decreases in long-term bond yields. Funded status of benchmark plans also declined across the board on a year to date basis.
Multinationals should review their specific situations to analyse the actual impact that the movement in capital markets and other company-specific factors have had on their plans and then determine the response that is most appropriate for their pension plan, said Steve Kerstein, managing director of Towers Perrin’s global retirement consulting practice.
There may be options available to mitigate the effects of the third quarter performance. Some of these are time sensitive, so prompt action is highly advisable.
Towers said that it has already seen several multinationals adding cash to their scheme in order to rebuild funding levels. A number of European schemes have also responded to the problem by reducing equity exposure.
On an individual country basis, key findings included:
- Australia: With an investment return of –6%, domestic equities performed better than the other domestic equity indices in the report during Q3. The funded level of the benchmark plan was also down 6%.- Canada: The 12% drop in the funded level of the benchmark plan reflected a 13.1% contraction in the domestic equity market, as measured by the S&P/TSXindex. Bond prices rallied on the Bank of Canada’s decision to leave interest rates unchanged.- Euro-zone: Domestic equities were the worst performers, falling 29% in the quarter and 40% year to date. Long-term bond yields continued to decline, pushing up plan liabilities.- Japan: The 8% decline in the funded status of the benchmark Japanese pension plan was relatively modest compared with the sharper declines posted in the US and Euro-zone plans. This was largely due to the comparatively high portion of assets in domestic securities, which were already at or near 19-year lows.- UK : Negative investment returns on local and international equity classes coupled with high equity content (70%) of the benchmark plan led to an investment return of –12% in the quarter and –17% year to date.
The report, Towers Perrin Global Capital Market Update: Third Quarter 2002, is available through www.towers.com.
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