A Towers Perrin study found the declines were a result of diminishing assets and liability increases. With funding levels comparatively low, Towers Perrin said a typical plan sponsor would have to cope with increasing pension expenses and required asset contributions. Some companies may also see large additional liabilities charged to their balance sheets at year-end 2002.
The particular effect for individual company plans, however, may vary significantly. The effect depends on such factors as:
- initial funded position of the plan
- interest sensitivity of benefit obligations
- asset allocation and manager performance
- use of long-duration fixed-income strategies
- offsetting effects of other actuarial assumption changes
- use of asset smoothing approaches that defer asset gains from prior years.
The Towers Perrin report, Capital Market Update: Review of Year 2002 Results for Pension Plans , analyzes portfolio return, pension liability changes and their combined impact on the funded status of Towers Perrin’s benchmark pension plan. It tracks the asset and liability performance of a model benchmark pension plan with an investment portfolio comprised of 60% equity and 40% fixed income. This diversified asset allocation approximates the average portfolio for the 300 large companies included in the Towers Perrin Retirement Financial Management Benchmarking Database.
During the period 1996 to 1999, the funded ratio for Towers Perrin’s benchmark plan (based on projected benefit obligations – PBO) grew from 85% to 131%. In the subsequent three years, the benchmark plan’s funded level dropped to 80% as of year-end 2002, the lowest level since 1993.
During the most current three-year period, the benchmark plan’s portfolio returned an average -4.4% return per year, while the Moody’s Aa bond yield dropped by a cumulative 1.4%, from 7.9% down to 6.5%. These results follow four exceptional years (1996 to 1999), over which portfolio returns for the benchmark portfolio averaged almost 15.7% annually while the Moody’s Aa yield increased from 6.9% to 7.9%, the Towers Perrin report said.
The Towers Perrin benchmark plan’s portfolio reported a -9.0% return for 2002, following a -3.6% return for the prior year. A more conservative 40% equity portfolio reported a -3.1% return for 2002, while a more aggressive 80% equity portfolio reported a -14.7% return.