Q1 U.S. DB Plan Funded Status Drops

May 21, 2004 (PLANSPONSOR.com) - The combination of lower than expected asset returns and a lower benchmark discount rate resulted in a decrease of 2% (to 63.9%) in the funded status of the benchmark U.S. pension plans in the first quarter, according to a survey.

The Towers Perrin research report about defined benefit plan performance worldwide said that in the U.S., equity markets produced modest first-quarter gains. The positive effects of continued consumer spending and increasing capital goods orders were partially offset by investor caution following the March 11 terrorist strike in Spain and greater uncertainty over events in Iraq. Falling bond yields led to a reduction in the benchmark discount rate to 5.83%.  

In general, worldwide, according to the Towers report, astrong start to the year for pension assets was tempered by the re-emergence of geopolitical concerns following the Spain train bombing and general instability in the Middle East.  Overall, the combination of higher asset values and increases in liabilities produced mixed results across benchmark plans in the first quarter of 2004.

“Further evidence of strengthening economic activity was accompanied by equity gains in several markets, but these positive trends were undercut by geopolitical instability,” said Leon Potgieter, Towers Perrin managing principal, in a news release.  “Moreover, the move by some investors to the safety of bonds contributed to the decline in interest rates that increased plan liabilities in the first quarter.”

Plans have still managed to do well over the past 12 months with strong investment returns outpacing the liability increases due to falling bond yields.  However, Potgieter cautioned that pension plan funding levels remain a concern. “Market movements over the past year have improved the funding status of most key markets, yet a substantial amount of the negative impact of falling interest rates and equity market losses since March 2000 are still to be recouped.  The typical plan still has a funding ratio that is 20% to 25% lower than at the beginning of 2000,” he said in the statement.

Meanwhile, according to Towers, U.K. returns from both equity and bond markets were flat in the first quarter.  Investor nervousness following the terrorist attacks in Spain and lower than expected manufacturing growth dampened equity returns, while bond returns were marginally positive, despite a rise in short-term government bond yields and a 25-basis point rate increase by the Bank of England in February.

As a result, the U.K. benchmark discount rate rose to 5.49% as of March 31, 2004, helping the liability side of the balance sheet.  However, this was more than offset by lower than expected equity returns resulting in a slight reduction in the funded status of the benchmark plan in the first quarter.