GLOBAL - Most pension funds across the world saw funding levels plunge for the third consecutive year in 2002.
Abysmal capital markets, fluctuating interest rates and decreases in long-term bond yields were blamed for funding levels stooping by as much as 21% last year, despite small gains during the fourth quarter.
The result is a cumulative 42% drop for schemes across Australia, Canada, the Eurozone, Japan, the UK and the US since January 2000.
Leon Potgieter, principal and head of Towers Perrin’s Global Consulting Group, who compiled the data, said: “The declines in worldwide capital market performance during 2002 combined with those in the last three years means companies may be facing significant declines in the funded status of their pension plans.
“Unless this trend is reversed, companies may be facing increased cash contributions and pension expense that could have potential balance sheet implications.”
In the Eurozone, bond and equity markets experienced positive returns during Q4 (+1%). Short-term bond yields decreased by 44 basis points during this time following the European Central Bank’s reduction of short-term rates. Long-term bond yields continued their decline, leading to an additional decrease in the discount rate and an increase in liability. The result was a 20% drop in year-to-date performance, or 42% fall over three years - the biggest for any region.
US schemes also fell 20% for the year, representing its largest decrease since 1973. Over the past three years the funded status of the average scheme was down 39% .
Australia ended with an average -12% return in 2002, or -26% over 3 years. Canada fell -13%, 25% lower than it was three years ago.
Japanese benchmark plans fell by 21% in 2002 and 40% since 2000. UK funded status grew by 2% during Q4, but was down 21% for 2002 and down 40% over the past three years.
“While there’s no question that many companies have experienced declines in the funding level of their pension plan, it’s also useful to keep events in perspective,” said Steve Kerstein, managing director of Towers Perrin’s global retirement consulting practice.
“We’ve seen plan funding levels in this range in the past. The decline in most financial market indexes in the last three years was preceded by several years of especially strong performance in capital markets, which was a great help to pension plans.”
Towers Perrin said that companies were tackling the problems by resuming contributions or by taking other measures, depending on their business and financial objectives.
The report, ‘Towers Perrin Global Capital Market Update: Fourth Quarter 2002 Results for Defined Benefit Pension Plans’, is available from www.towers.com.
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Respondents say they should only be required in certain situations as the system is not broken.