Study: Q2 Pension Plans Flat Globally

October 19, 2006 ( - Negative second-quarter returns in the equity markets were counterbalanced by higher long bond yields, leaving the funded status of global benchmark pension plans relatively unchanged, according to a Towers Perrin analysis.

A Towers Perrin news release said that  Brazil, the US and the Euro-zone (Netherlands and Belgium) saw slight gains, while Australia, Canada and the UK saw slight losses, according to the analysis of global capital market performance and its effect on defined benefit (DB) pension plans. 

The second quarter saw the first drop in equity markets in more than 18 months. Martine Ferland, a Towers Perrin principal and leader of the firm’s HR Services Business Global Consulting Group, said in the release that the decline grew out of uncertainty over economic growth and higher interest rates, as well as instability in the  Middle East. 

“It was a mixed bag this quarter,” Ferland said. “Equities were down, but the higher interest rates increased bond yields and reduced liabilities. The leveling effect of higher bond yields meant that there was very little overall change in the funded ratios of the benchmark plans in the key countries where we track the impact of changes in capital markets.”

Specific Markets

Focusing on specific markets, the analysis found that the  US equity market lost ground in the second quarter, mainly due to sharp falls in the information technology, consumer discretionary and cyclical sectors. Higher bond yields pushed fixed-income returns lower. Long corporate bond yields have now risen a full percentage point to more than 6% in the past 12 months, and plan sponsors benefited from a 33 basis point rise in the benchmark discount rate. The net effect was a one percentage point rise in the funded status, to 89%.

Meanwhile, the analysis found that in  Canada, it was a poor quarter for pension investments with all asset classes producing negative results. The energy sector, which had driven equity returns for the past year, fell by as much as 15%, although there was a slight recovery toward the end of the quarter. International equity returns were held back by an appreciating Canadian dollar, while fixed-income investments suffered from a rise in yields across the yield curve. The funded ratio of our benchmark plan fell one percentage point, to 75%.

In the  United Kingdom, equity markets pulled back from historical highs experienced in the first quarter, although the declines in local share prices were not as dramatic as those in other major international markets.  Bond yields rose at all points along the yield curve, resulting in negative returns for fixed-income investments as well. This reduced liabilities, but not enough to offset negative asset returns, and the funded ratio fell two percentage points, to 84%.

The report, Towers Perrin Global Capital Market Update: Second Quarter 2006 Results , covers DB pension plans in  Australia, Brazil, Canada, the Euro-zone, Japan, the UK and the US. 

More information is here .