Towers: Global Pension Funding Levels Climb Higher in Q3

December 29, 2003 ( - Capital markets across the globe showed continued improvement during the third quarter of 2003, bringing with them improvement in the funding levels of global benchmark pension plans.

The global improvement in equity markets boosted fund assets enough to compensate for still declining benchmark discount rates, according to Towers Perrin’s Global Capital Market Update: Third Quarter 2003.  The third quarter’s results also continued a trend of improvement started during the second quarter (See  Towers: Global Pension Funding Levels Up in Q2 ).

Towers’ report examines a benchmark plan for each country, reflecting liabilities and current interest rates.  Results show in plans in the United States, Canada and Japan, the funded status of benchmark plans increased in the second quarter of 2003, with the United Kingdom unable to copy this trend, declining by 1%.  Key among winners: 

  • 3% – Canada
  • 2% – Japan
  • 2% – US.

However, despite the rush of sentiment in the third quarter, three of the four plans are still down for the year – UK off by 6%, Canada 3% lower, US down 2% – with only Japan’s 7% gain reversing the course.  This comes as the benchmark plans still have cumulative decreases of between 27% and 44% in funded status since January 1, 2000, before the beginning of the general downturn in global markets.

“It has been a difficult three years for many organizations that may still be facing further cash contributions and substantial pension expense, not to mention potential balance sheet implications,” said Steven Kerstein , managing director of Towers Perrin’s global retirement practice. “The good news is that there may be options available to mitigate cash requirements and pension expense changes. Some of these options are time-sensitive, so company financial officers should begin now to consider their alternatives.”

Individual Countries

Plans in the United States saw improvement in the equity markets and a slight dip in the bond markets during the third quarter that contributed to a 2% return for the benchmark US plans.  Further, long-term corporate bond rates increased marginally, translating into a 5 basis point hike in the benchmark discount rate.   Canada’s equity performance combined with an adjusted benchmark discount rate was enough to improve the funding status for the benchmark plan by 3% during the third quarter.

The UK was affected by a rise in the benchmark discount rate of 5.30% that was offset by the increase in expected salary inflation.   Combined, these factors contributed to a 1% dip in the funding status of benchmark plan in the UK in the third quarter. 

Japan had a solid third quarter, with double digit equity market returns on signs of growth in business capital investment and exports.   The benchmark return was held back though by overseas equity and bond investments.

A copy of the full report can be found  here .