Funding Drop Erases Pensions’ Recovery

July 14, 2010 ( - After three consecutive quarters of improvement, a new analysis from Hewitt Associates found that significant decreases in global equity markets and interest rates led to a decline in the overall financial status of pension plans in the second quarter of 2010.

According to a Hewitt news release, this market volatility contributed to the lowest global pension funding levels Hewitt has seen since the onset of the financial crisis and recession, and it erased nearly all of the improvement in funded status that pension plans experienced over the last 18 months.  

Of all the regions covered by Hewitt’s Pension Risk Tracker tool, U.S. companies in the S&P 500 saw the most notable decrease in pension funding levels in the second quarter, dropping from 90% at the end of March 2010 to 80% at the end of June 2010. This is primarily due to a 10% to 15% decline in equity markets and the lowest corporate bond rates in five years.  

Pension funding levels also fell for Canadian companies in the TSX, from 99% at the end of March 2010 to 95% at the end of June 2010. Significant market volatility in the region, including a combination of poor equity returns and declining corporate yields were major factors in the decline of funding levels, the news release said.   

Looking ahead, Canadian pension plan sponsors can continue to expect a rocky road, according to Rob Vandersanden, a principal in Hewitt’s Calgary office. “Canada’s transition to International Accounting Standards in 2011 means the funding position of the plan will sit directly on the company’s balance sheet. With this continued market volatility, organizations need to be vigilant about monitoring the risk factors that impact investment returns—such as interest rates, currency exchange rates and inflation—and adjust their strategies to address the changing landscape,” he said, in the announcement.  

Hewitt’s Pension Risk Tracker found that the overall funded status of pension plans in all regions covered was 80% at the end of the second quarter of 2010 – 7% lower than the funded status levels at the end of the first quarter. This translates to about $500 billion global pension deficit. According to Hewitt’s estimate, global pension assets fell by $91 billion in the quarter, while pension liabilities increased by $106 billion over the same period.  

Hewitt monitors and analyzes daily pension funding levels of U.S., U.K., Continental European, and Canadian companies in the S&P 500, FTSE 350, DJ Euro Stoxx 50, and TSX, respectively, through its Pension Risk Tracker tool.