Towers: Global Pension Funding Levels Up in Q2

August 27, 2003 ( - Capital markets across the globe showed improvement during the second 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 compensation for still declining benchmark discount rates, according to Towers Perrin’s Global Capital Market Update: Second Quarter 2003.  The second quarter’s results also reversed a downturn in benchmark plan portfolio funding levels during the first quarter (See  Global Pension Funding Levels Down in Q1 ).

Towers’ report examines a benchmark plan for each country, reflecting liabilities and current interest rates.  Results show in plans in the United States, the United Kingdom and Japan, the funded status of benchmark plans increased in the second quarter of 2003, with Canada unable to copy this trend, declining by 4%.  Key among winners: 

  • 9% – Japan
  • 5% – UK
  • 4% – US.

However, despite the rush of sentiment in the second quarter, three of the four plans are still down for the year – Canada off by 6%, UK 5% lower, US down 3% – with only Japan’s 4% gain reversing the course.   This comes as the benchmark plans still have cumulative decreases of between 29% and 43% in funded status since January 1, 2000, before the beginning of the general downturn in global markets.

Individual Countries

Plans in the United States saw improvement in both the bond and equity markets during the second quarter that contributed to a 4% return for the benchmark US plans.   Further, long-term corporate bond rates decreased approximately 40 basis points, thus leading to an equivalent decrease in the benchmark discount rate. However, the increase in liabilities was more than offset by the positive asset returns.

Similar results were seen in the UK, which was affected by a 15 basis point drop in the corporate bond yield and, likewise, a decline in the benchmark rate and rise in liabilities.   Regardless, the rising equity tide more than made up for any increase in liabilities helping the benchmark to net a 5% increase in funding status.

Unlike the other two, Canada’s equity performance was not enough to turn back the increase in liabilities due to a decline of 80 basis points in the discount rate, equaling a the 4% decrease in funded status for the benchmark.   However, positive returns from the quarter made up for the first quarter’s red ink, leading to positive year-to-date domestic equity and fixed-income returns.

Japan on the other hand was able to reap the rewards of its equity market performance, as it was unaffected by a discount rate that remained unchanged.   The positive asset returns increased the funded status of the benchmark plan by 9% in the second quarter.