Investing March 25, 2002

Capital Markets Crumple Pension Plan Funding

March 25, 2002 (PLANSPONSOR.com) - Slumping capital markets had a major impact on the financial performance of pension plans around the world last year, reducing typical plan funded levels 10% to 15%, according to a new report.
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The report, Towers Perrin Global Capital Market Update: 4th Quarter 2001 Results, found the funding levels of various pension systems around the world slumping for the second year in a row.  Indeed, when combined with year 2000 results, benchmark plans in the US, UK, Japan and the Euro-zone saw drops in funded levels of approximately 25%, according to the report.

Short “Fall”
 
In 2001, funding levels in the US dropped 13% on top of an 8% decline the year before.  That was better than the 18% drop in the UK, the 15% shortfall in Canada and the 17% gap in the Euro-zone.  According to Towers Perrin, Japan suffered an 11% drop in 2001, but that was on top of a 15% decline a year earlier.

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Australia was the only market included in the report to achieve a positive benchmark local equity return for 2001, returning a positive 10% for 2001. However, when looking at the combined effects of asset and liability movements in this market, the funded status of the benchmark plan for Australia declined 2% during 2001.

That shrinkage was the combination of combined impact of poor investment results and increasing liabilities, according to Towers Perrin.  In most of the countries studied, equity returns were negative for the year, and interest rates declined.  Towers Perrin based its analysis on a benchmark plan in each country, with liabilities estimated under accepted international accounting standards.

Next Steps

Towers Perrin recommends that multinational employers with DB plans consider a number of possible actions, including the review of:

  • the funded status of individual plans
  • local contribution requirements
  • key actuarial calculations
  • each plan’s investment strategy.

Methodology

The benchmark portfolio returns in each country are based on a typical diversified mix of domestic and international stocks as well as selected fixed-income securities. Liability calculations in each country are based on typical defined benefit plan designs covering a relatively mature population of employees and retirees, and are in accordance with accepted international accounting standards, according to Towers Perrin.

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