Q1 U.S. DB Plan Funded Status Drops
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.