The global decline in equity markets hit pension funds on two fronts, on fund assets as a direct result of investment performance and on plan liabilities through the effect in interest rates on economic assumptions, according to Towers Perrin’s Global Capital Market Update: First Quarter 2003. The first quarter’s results also reversed an uptick in benchmark plan portfolios funding levels during the fourth quarter (See Pension Funding Level Up in Fourth Quarter, Down in 2002 ).
Towers’ report examines a benchmark plan for each country, reflecting liabilities and current interest rates. Results show in plans across the board – the United States, Canada, the United Kingdom and Japan – the funded status of benchmark plans declined to start 2003. Key a mong the results:
- UK – 10%
- US – 7%
- Japan – 5%
- Canada – 2%.
Plans in the United States were hit with losses in both domestic and international equities too great for slight gains in domestic fixed income to overcome. Further, long-term corporate rates decreased 30 basis points and the benchmark discount rate also decreased. The combination of effect of negative asset performance and increasing liabilities for this quarter was the continued decline in the benchmark’s funded status, which is now at the lowest point in the 13-year history of the plan.
Similar results were seen in the UK, which hold the dubious distinction of largest decline among the benchmarks of the quarter. Affecting the UK benchmark was the negative return recorded in equities that was greater than the 0.2% gain in bonds. Additionally, despite a seven basis point increase in long-term government bonds, the benchmark discount rate was lowered with the decrease in all other bonds.
Deviating from the hot-cold fixed-income, equity return relationship was Canada, which was the only market to experience negative fixed-income returns in the first quarter. However, the decrease in asset returns was somewhat offset by a reduction in liability, due to an increase in the discount rate, resulting in a 2% decline in funded status.
Yet none of the other markets could hold a candle to Japan’s recent dismal performance that was only further buffeted by continued weakness in global equity market. The prolonged equity declines were once again too great for the slight gains from Japanese and foreign fixed-income asset classes. Additionally, the first quarter saw continued decline of Japanese government and corporate bond yields to near record lows owing to the deflationary cycle gripping the country and the government’s zero-interest rate policy. Even though the support cast may be different, the script remained the same for the Japanese benchmark: another decrease in the discount rate.