Mixed Picture for Global DB Funding in Q1

June 8, 2005 (PLANSPONSOR.com) - Lower than expected first-quarter equity returns in several countries produced a mixed bag when it came to the funded status of benchmark pension plans.

Those in North America, the Euro-zone and Australia suffered declines, while a Towers Perrin analysis of defined benefit (DB) pension plans, also found that funding levels increased only marginally in theUK, Japan and Brazil.

According to Towers Perrin, theUS equity market lagged all others during the quarter as investors reacted nervously to the combined effects of the growing trade deficit, high energy prices and reemerging signs of economic weakness in some areas.

“Given the continued volatility in world capital markets and the lower funding levels that prevail for many pension plans around the world, multinational companies need to continually assess their contribution and investment strategies and other financial aspects of their pension plans,” said Leon Potgieter, a Towers Perrin principal and head of the firm’s HR Services Business Global Consulting Group, in a news release.

Other key findings for the quarter:

  • Higher benchmark plan liabilities marginally offset higher asset value, although the absolute movements since year-end have not been substantial.
  • Equity markets generally produced positive returns, although there were signs of a pause in global markets following two years of above-average returns.
  • Even though some central banks continued to raise short-term interest rates, movements in pension plan discount rates were generally lower in major markets due to a slight drop in long-term nominal bond yields. This increased pension liabilities.

Country Analysis

The following are highlights from the impact of the capital markets on the benchmark pension plans in each country, according to the Towers Perrin report:

United States: Pension investments suffered from a particularly unsatisfactory quarter, with all benchmark asset classes experiencing negative returns. International equities were positive when measured in local currencies, but when measured in dollars suffered from an upturn in theUS currency during the period. Fixed-interest investments produced low returns due to slightly higher yields on mid-range maturity bonds and widening credit spreads among lower-quality corporate bond issues. This mixed movement in bond yields caused a slight downward adjustment in the benchmark discount rate to 5.79% by the end of the first quarter, resulting in marginally increased plan liabilities. However, negative investment returns on US equities were the primary reason why the funded ratio fell two percentage points, to 63%.


Canada:  Canadian pension assets delivered only a modest positive return in the first quarter even though the Canadian equity markets were the strongest performer in the Towers Perrin study. US equity returns and a strong Canadian dollar were largely responsible for the poor results. Pension liabilities increased during the quarter as bond yields continued to fall, and the discount rate for the benchmark plan fell 15 basis points, to 5.65%, by the end of the quarter. When combined with lower investment returns, the funded ratio inCanada fell to 75%, its lowest level since September 2003.


United Kingdom  British equity markets were buoyed by the prospects of an end to the current cycle of monetary tightening and posted respectable gains in the first quarter, with energy and metals companies performing best. A weakUS equity market, however, drove down international equity returns, while fixed-interest investments produced negative returns due to rising nominal bond yields. As a result, the benchmark discount rate was revised upward by 11 basis points, to 5.4%, reducing pension liabilities. However, this was offset by weak overall asset returns, leaving the funded ratio unchanged at 60%.