In the United States, the funded status of the benchmarks was up 2.52% in the second quarter, and has now improved 0.35% in 2004. The largest increases in funded status were notched in Canada, where the funded ratio rose 6.13% in the second quarter and have now improved 6.84% year-to-date. Also higher was Japan (5.5% in the second quarter, 6.58% year-to-date), Euro-zone countries (5.07%, 5.13%), UK (3.09%, 2.96%) and Australia (2.87%, 4.27%), according to a Towers Perrin analysis of defined benefit pension plans in selected countries.
In Towers Perrin Global Capital Market Update: Second Quarter 2004 Results, the consultancy attributes the increase in plan funding levels to the global upturn in interest rates as the US Federal Reserve began tightening monetary policy on the evidence of stronger labor markets. In turn, the rise in bond yields translates into higher benchmark discount rates, which produced lower calculations for plan liabilities.
Working against a rise in funded status however were lackluster investment returns across major asset classes as higher corporate earnings were offset by continuing inflationary concerns, higher energy prices and ongoing instability in the Middle East , the analysis found.
Looking closer at some of the major markets, Towers said higher discount rates in the US more than offset the slightly negative investment returns to produce an overall improvement in funded status of around 2.52%, to 65% for the quarter.
In Canada, the benchmark discount rate was raised sharply at the end of the quarter in response to rising bond yields across all maturities. This was the primary driver behind the improvement in the funded status of the benchmark plan by 6.13%, to 81% in the quarter, as the Canadian equity market was generally flat in the quarter despite positive performance in the information technology and energy sectors.
Across the pond, a strong economic recovery in the UK led by consumer spending and a housing boom led the Bank of England to raise rates four times in the last eight months, with consecutive basis-point rises in May and June. As bond yields continue to rise, the benchmark discount rate was raised to 5.73% at the end of the quarter, improving the liability status of the benchmark plan. Fixed-income returns were negative, with rising bond yields, and the overall funded status of the benchmark plan improved by 3.09%, to 60% for the quarter.