The global decline in equity markets hit pension funds two fold: 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: Third Quarter 2002.’
Results show pension plans in the US, Canada, Japan, and the UK recorded declines in pension funding levels during the third quarter. Towers’ report examines a benchmark plan for each country, reflecting liabilities and current interest rate specific to that country.
Benchmark plans for specific countries showed quarterly and year-to-date (YTD) returns of:
|US||– 16%||– 23%|
|UK||– 12%||– 23%|
|Canada||– 12%||– 16%|
|Japan||– 8%||– 16%|
In third-quarter decline in the funded status of the American benchmark plan outpaced declines in the other countries, reflecting the steep drops in domestic and international equities as well as a downturn in interest rates that pushed up liabilities by 6%.
The United Kingdom was hit hard by the large proportion of its funds invested in equities (70%), coupled with overall n egative investment returns on local and international equity classes.
Japan’s benchmark suffered a modest 8% decline in the funded status of its benchmark. This was largely due to the comparatively high portion of assets in domestic securities, which were already at or near 19-year lows.
The effect of the third quarter is already being felt by multinational pension funds. “We’re seeing some large multinational companies moving to add cash to their plans in order to rebuild funding levels,” said Leon Potgieter, principal and head of Towers Perrin’s Global Consulting Group. “We’ve also seen a movement in Europe to adjust the composition of pension plan portfolios by reducing the proportion of assets in stocks.”