Worldwide Pension Crisis Pricetag Up To $1.5 Trillion

The British arm of consultants Watson Wyatt say the current worldwide “pension crisis” could cost companies $1.5 trillion over the next five years.   This is due to the one-two punch of assets being decimated by the bursting of the stock market bubble in 2000 and aging populations in many developed countries throwing many pension funds into deficit against their liabilities, according to the group’s 2004 Global Investment Review report.

In fact, Watson Wyatt said between 1999 and the beginning of this year, global pension balances lost more than 40% of their value as asset level plummeted while liabilities skyrocketed.   This in turn will lead many companies to large cash contributions over the next few years.   “The funding shortfall will inevitably trigger significant cash injections into corporate pension funds, in the order of between $100 billion and $300 billion a year for several years,” the Watson Wyatt report prognosticates.

To arrive at the aggregate number, Watson Wyatt examined the current gap between global pension assets and future liabilities and assumed an average 8% investment return.   Yet even with these numbers, if companies did not infuse any cash into their defined benefit plan, it would take 18 years for the deficit gaps to close.  

Thus Watson Wyatt said companies could make contributions of 3% of current assets every year. Plugging the hole will take five years and cost up to $300 billion a year, or a total of $1.5 trillion.   Even this solution puts a heavy burden on corporate bottom lines though.   “This will put a considerable strain on corporate cash flows,” Watson Wyatt said.

Worst hit by the double whammy of dipping assets and rising liabilities was the United States, United Kingdom and Swiss pension funds, while Canadian and Dutch funds went through relatively unscathed.   However, some good news could be found in the most recent year’s stock market returns, as Watson Wyatt says the average global funding level could approach 80% in late 2003.

A copy of Watson Wyatt’s 2004 Global Investment Review can be found at http://www.watsonwyatt.com/europe/pubs/globalinvestment/ .