GLOBAL - Typical global pension plan funding levels have fallen by between 10 and 15% due to the downturn in capital markets during 2001.
This is according to Towers Perrin’s report, Towers Perrin Global Capital Market Update: 4th Quarter 2001 Results, which focused on defined benefit (DB) plans in selected countries.
The report found that benchmark plans in the US, UK, Japan and the eurozone, when combined with year 2000 results, saw funding levels drop by approximately 25%. Canada and Australia fared only slightly better with losses of around 15% over two years.
The poor results in 2001 are attributed to a combination of poor investment results and increasing liabilities. In most of the countries studied, equity returns were negative for the year and interest rates declined.
All of the regions surveyed recorded decreases in funded status for their benchmark plans, apart from Canada which experienced a 1% gain in 2000.
Australia was the only market included in the report to achieve a positive benchmark with local equity return for 2001, returning a positive 10%.
However, Towers Perrin warned that the results of the survey should not cause alarm. Massimo Borghello, principal and a senior actuary in Towers Perrin’s Global Resources Group, said: “Companies and their employees need to keep these results in perspective. In some countries, relief is available from exceptional years of performance during the boom in capital markets in the late 1990s that enabled many organisations to build up pension surpluses.”
But he added: “Still, there’s no question that the fall in stock market values and lower interest rates have combined to prompt many companies sponsoring defined benefit plans to look for ways to make sure these plans remain adequately funded and follow sound financial management practices.”
Possible actions suggested by Towers Perrin for DB plans are reviewing the funded status of individual plans, local contribution requirements and key actuarial calculations, such as those for plan expense under the relevant accounting standard. It also suggests that companies may also benefit by reexamining each plan’s investment strategy.
Borghello also believes that the falling funding levels may lead those companies who have enjoyed reduced contributions or contribution holidays to return to a full level of contributions.
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