Administration January 4, 2012

Towers Watson DB Index Shows Canadian Pensions Suffered

January 4, 2012 (PLANSPONSOR.com) - The combined effects of poor investment returns and decreasing interest rates during 2011 caused the Towers Watson DB Pension Index to fall 16.2%.
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Based on data collected by Towers Watson, this would mean the typical Canadian defined benefit plan, which was 86% funded on an accounting basis at the start of 2011 (the median of a database of companies being tracked by Towers Watson), will find itself at only 72% funded at the end of the year, unless the plan sponsor has made additional contributions during the year to shore up the plan’s financial health.  

The typical 60%/40% allocation of pension plan assets to stocks and bonds used for the Pension Index would have only generated 0.5% returns over 2011, while pension plan liabilities would have increased by close to 20% due to the decline in interest rates over the same period.  

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Roland Pratte, a senior investment consultant at Towers Watson said, “DB plan sponsors are acutely aware of the downward trend in interest rates, and potential volatility in the stock markets. In response, many have already taken steps to reduce the size of their DB pension liabilities. For 2012, plan sponsors should continue to work on managing their pension financial risks with focus on both the investment and plan design fronts, and paying careful attention to their ongoing plan funding strategies.”  

The Towers Watson DB Pension Index tracks the performance of a hypothetical DB pension plan that was fully-funded in the plan sponsor’s financial statements at the end of 2000.
Administration January 4, 2012

Funded Status of U.S. Pensions Falls in December

January 4, 2012 (PLANSPONSOR.com) – The funded status of the typical U.S. corporate pension plan fell 2.7 percentage points in December, reports BNY Mellon.  

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According to the BNY Mellon Pension Summary Report for December 2011,  the funded status for the year declined 12.7 percentage points to 72.4%.

The decline in funded status was the second biggest calendar year decline since BNY Mellon began tracking this data in 2005.  The large decline in 2011 was due to the liability discount rate reaching a new historic low, 4.36%, surpassing the record set in September 2011, according to the report. BNY Mellon noted assets for the typical plan did increase 2.7% in 2011, but liabilities increased much faster—20%—to send funding levels lower for the year.

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The rise in liabilities during December was driven by a decrease in the Aa corporate discount rate, which fell 30 basis points to 4.36%, according to BNY Mellon. Plan liabilities increased 4.6% in December, overshadowing a 0.8% increase in plan assets, the report said. The plan assets increased as a result of a slight gain in U.S. equity markets.

“The continuing uncertainty regarding the prospects for a U.S. economic recovery and the ongoing European debt crisis drove investors back into bonds during December, which sent interest rates lower,” said Jeffrey B. Saef, managing director, BNY Mellon Asset Management, and head of the Investment Strategy & Solutions Group (a division of The Bank of New York Mellon). “We expect continuing volatility until investors believe the recovery in the U.S. is sustainable and some resolution is reached in Europe.” 

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