Falling Markets, Rising Liabilities Hit Pension Funding

March 13, 2001 (PLANSPONSOR.com) - Poor stock market returns cut into pension funding levels by 10-15% last year, according to a new Towers Perrin report.

Liabilities, representing pension commitments of the programs, also rose due to changes in the underlying economic assumptions, notably a decrease across the board in discount rates, according to BNA.  Tempering that impact were lowered expectations for salary increases and inflation. 

The report, Global Capital Market Update: Review of Year 2000 Results for Pension Plans in Selected Countries, found that the average change in reported funded levels in 2000 varied among the countries examined, based on a benchmark plan.  Actual results would, of course, depend on plan design, asset allocation, employee demographics and currency fluctuations, among other considerations.

While there was a 10% decline among pension plans in the US, the UK and the Eurozone, Australia suffered a 15% decline but Canada experienced only a slight decline.  On a worldwide basis, fixed income investments fared well, and countries where that asset class predominated holdings fared equally well on a relative basis.

Around the World

In the US, most plans failed to meet their target asset returns, and while stocks suffered across the board, value stocks outperformed growth investments by 30%.  Despite the drop in funded status, the report found that the average US plan’s funded status is still slightly above where it was two years ago – and 30-40% above where it was in 1995.

Most UK pension plans have very aggressive equity allocations according to the report.  As a result, the average plan experienced a negative return on assets.  Hardest hit were plans with pension indexation guaranteed at a fixed level.

While funded plans in Belgium and the Netherlands suffered a negative return on plan assets, overall Eurozone pension plans were helped by a higher bond allocation than that found in most developed countries.

The average Canadian plan enjoyed a return on fund assets of 8-9%, largely in line with return targets.  The report found that those with an above average exposure to domestic investments fared best, though here lower bond yields were something of a drag.

In Australia the average plan experienced a return on fund assets of approximately 7%, at or near target for most plans.

The report recommends that multinational companies should proactively manage pension reporting to meet their objectives, including:

  • Conduct a detailed review of the 2001 pension expense (or budget expense) calculations to ensure that any early warning signs are identified and corrected
  • Review actuarial assumptions, including financial and demographic

Conduct a review of the 2000 investment performance of local pension plans to highlight areas for continuous improvement vis-à-vis overall objectives and benchmarks

– Nevin Adams        editors@plansponsor.com