Study: Q3 US Pension Performance Sluggish

December 13, 2004 ( - Third quarter pension performance in the US was no great shakes with asset growth largely flat amid lackluster employment figures and sluggish retail sales that sparked concern about future economic growth.

That was one conclusion of the latest Towers Perrin Global Capital Market Update which also asserted that rising oil prices and worries over the impact on economic growth contributed to a decline in the funded status of benchmark pension plans in most major retirement markets around the world in the third quarter. The only exceptions were Australia and Brazil, where funded status remained unchanged and increased 4%, respectively.

A news release said that in the US, equity markets were slightly lower with the technology and consumer staples sectors the primary underperformers, but fixed-income positions did better.   Lower long-term bond yields prompted Towers Perrin to reduce its discount rate for the benchmark US plan to 5.94% at the end of the quarter, which contributed to an increase in pension liabilities. According to Towers Perrin, when combined with flat asset returns, the funded status of the US benchmark plan declined by four percentage points, to 63%, at the end of the third quarter.

Meanwhile, in Canada, strong performances in the energy and basic materials sectors pushed the Canadian stock market into the black for the period, ending with a 1.9% gain. However, international equity returns lagged due to poor returns in the US, Japan and Europe, as well as an appreciation in the Canadian dollar.   Falling-long term nominal bond yields caused a downward adjustment in the benchmark discount rate, which in turn had a substantial impact on pension liabilities, according to Towers Perrin. Overall, Canada experienced the largest drop in funded status of the countries studied, declining almost five percentage points, to 76%.

Finally, across the pond in the UK, stock returns were solid, but signs of a dip in consumer spending and a slowdown in the housing market dragged down the rally. Bond markets continued to factor in future interest-rate reductions and falling bond yields helped increase returns on fixed-interest investments.   Lower long-term nominal bond yields raised future pension liabilities for the Towers Perrin UK benchmark plan.   The benchmark discount rate was reduced to 5.52% at the end of the quarter and this increase, in turn, contributed to a decline in funded status by one percentage point, to 59%.

The report covers defined benefit pension plans in Australia, Brazil, Canada, the Euro-zone, Japan, the U.K. and the US. The impact of capital markets on these pension plans is on fund assets as a direct result of investment performance and on plan liabilities (as measured under accepted international accounting standards) through the effect of changes in interest rates on economic assumptions, Towers Perrin said.