Not only that, a benchmark pension portfolio of 60% stocks and 40% bonds reported a -3.6% 2001 return, coming on the heels of a -0.3% return for 2000, Towers said in a press release announcing its study, Capital Market Update: Review of Year 2001 Results for Pension Plans
Even with such grim numbers, Towers researchers said the bull market of 1996 to 1999 – during which Towers’ benchmark portfolio returned an average 15.7% – left most plans better off than they were before the robust market kicked in. The Towers’ portfolio was 85% funded at year-end 1995 and is 100% funded today, researchers said.
In addition to analyzing the effects of current market conditions on pension funding ratios and performance levels, the Towers study examined the 1972 to 2001 period for parallels to the current market scenario.
Researchers said they chose that time frame because ERISA was enacted in 1974 and the FAS 87 pension accounting standard was approved in 1985. The two required companies to advance fund their plans and to set accounting costs in light of current capital market conditions.
According to Towers:
- other than Towers’ benchmark’s -3.9% return over 2000 and 2001, the study found only one other period, 1973 to 1974, (-21.6% return) where performance was in the minus column over two consecutive years,
- there is no other two-year period other than 2000-2001 where sponsors experienced a similar combination of negative investment return and declining interest rates
Suggestions for Sponsors
Towers said plan sponsors should rethink their strategies in light of what’s occurred in the capital markets. Specifically, researchers suggested:
- examining the potential for more balance sheet charges,
- reviewing the selection of financial assumptions used in valuing the plan,
- reviewing pension plan asset allocations to make sure they are the best fit for the plan’s liabilities
The study tracked the asset and liability performance of a model benchmark pension plan. This asset allocation of 60% stocks and 40% fixed income approximates the average portfolio for the 280 large companies included in the Towers Perrin Retirement Financial Management Benchmarking Database.