Pension Funding Gaps Narrow Worldwide: Aon Hewitt

Aon Hewitt’s analysis found that the funded status of global pension plans were 87% at the end of 2010, up (very) slightly from 86% at the beginning of the year. According to the consultancy’s estimate, global pension assets increased by 8% during the year, while pension liabilities increased by 7%.    

Pension funded status in the U.S. closed 2010 at 88 percent, with no change from the start of the year. Albeit, the year was marked by three quarters of positive asset returns, which offset the negative returns of the second quarter and also negated the drop in interest rates, according to the report.  

The fourth quarter of 2010 saw an increase in U.S. pension funded status from 82% to 88%, driven by what Aon Hewitt termed “strong equity returns” ranging from 5% to 15%, and a 30–50 basis point recovery in corporate bond rates in time to boost the end-of-year pension funded status reporting.  

“Despite troughs in funded status not seen since the heart of the financial crisis and sub-five percent discount rates, 2010 will be looked back upon as a year for plan sponsors to adjust their strategies and gear up for action in 2011 and beyond,” noted Joe McDonald, Aon Hewitt’s Global Risk Services leader in the U.S. “That action will take the form of dynamic de-risking, in most cases, where pension plans de-risk their investments as funded status improves. Plan sponsors will also shift their focus to the payment of lump sums starting in 2012, when the changes in terms brought on by the Pension Protection Act are fully implemented.”  

Canadian “Club”  

In Canada, a positive fourth quarter helped reverse some of the losses pension plans experienced through the first three quarters of 2010, according to Aon Hewitt. The consultancy notes that in the fourth quarter, assets increased by 4%, while liabilities decreased by 2%.  The average funded ratio among companies in the S&P/TSX index increased from 88% at the start of the quarter to 94% by year’s end. 

However, Aon Hewitt cautioned that the positive results were not enough to reverse loses experienced during the first three quarters. Volatility continued to be a major concern throughout the quarter, with daily changes in funded ratios of 2.0%.    

Andre Choquet, with the Financial Risk Consulting team in Canada said, “As Canada moves to the International Financial Reporting Standards in 2011, the funded ratio volatility will appear directly on company balance sheets. Companies need to determine what level of volatility is acceptable to them, and adjust their investment strategy to one that matches that volatility.” 

Aon Hewitt’s update on pension funding in the U.K. and Continental Europe is at http://www.plansponsor.com/Dramatic_Improvement_for_UK_Pension_Deficits_in_2010.aspx