The global decline in equity markets hit pension funds on two fronts: on fund assets as a direct result of investment performance and on plan liabilities through the effect in interest rates on economic assumptions. This continues a three-year trend of broad declines with benchmark plans in these countries experiencing drops from 25% to 42% during this period,according to Towers Perrin’s ‘Global Capital Market Update: Fourth Quarter 2002.’
Results show despite pension plans in the United States, Canada, and the United Kingdom recording an uptick in the fourth quarter of 2002, the funded status of benchmark plans declined across the board during the fourth quarter and year to date. The US, UK and Canada all experienced double-digit declines in defined benefit plan funded status for the year.
Japan was the onlycountry in this report to experience a negative local equity return during the fourth quarter, contributing to a negative investment return for this quarter.Towers’ report examines a benchmark plan for each country, reflecting liabilities and current interest rate specific to that country.
Benchmark plans for specific countries showed quarterly and 2002 returns of:
The 20% decline of funded status for the US benchmark plan in 2002 represented the biggest decrease in the past 30 years. Combined with the decreases in 2001 and 2000, the second and third worst decreases, respectively, in the past 30 years, the funded status of the plan is down 39% over the past three years.
Similar results were seen in the UK and Canada. Overall, the funded status of the UK benchmark plan was down 21% for 2002 and down 40% over the past three years. The US’ neighbors to the north saw all asset classes experience positive returns for the fourth quarter, but the funded status still remains down 13% for the year and is 25% lower than it was three years ago.
Japan was the only country in this report to experience a negative local equity return during the fourth quarter, contributing to a negative investment return for this quarter. When coupled with an increase in liability due to a decrease in the discount rate, Japan was also the only country in this update report to experience a further weakening of the funded status during this quarter. The dismal fourth quarter performance in the funded status of the Japanese benchmark plan contributed to a decrease of 21% in 2002 and 40% over the past three years.