GLOBAL – The funded status of benchmark pension plans declined further in the first quarter of 2003 across the globe, according to human resources consultant Towers Perrin.
In its global capital market update, the firm says that the continuing decline in the performance of bonds and equities worldwide through the first quarter of this year has led to further reductions from two percent to 10% in the funded levels of benchmark company pension plans.
When coupled with the decreases in funded status since 2000, the benchmark plans globally experienced cumulative decreases of between 26% and 46% in funded status.
The analysis examines the impact of changes in the stock and bond markets on a benchmark plan in each country, with liabilities estimated under accepted international accounting standards and adjusted to reflect current interest rates in each country.
The euro zone saw a seven percent decline in the funded status of its benchmark plan in the first quarter. The decrease is attributed to negative returns in the equity markets in the euro zone, and bond yield declines, which in turn led to another decrease in the benchmark discount rate, resulting in an increase in liability.
The US also saw a seven percent erosion in the funded status of its benchmark plan – this is the lowest the funded status has been in the plan’s 13-year history. Here losses in both the domestic and international equity markets, and falls of 30 basis points of long-term corporate bond rates were held responsible.
The UK benchmark plan suffered the largest decline among all the major retirement markets during this quarter, losing 10%. Although long-term government bonds increased seven basis points, all other bonds decreased, which led to a lowering of the benchmark discount rate. Combined with the euro zone, the UK has seen the largest drop in funded status –46% - since the beginning of 2000.
Both Japan and Australia saw a five percent decline in their benchmark plan funded status. Canada experienced the smallest decline in the first quarter at two percent.
The global capital markets have picked up since mid-March but Steve Kerstein, managing director of Towers Perrin's global retirement consulting practice believes, there is a mixed picture.
"We've seen encouraging signs of improvement in global capital markets, notably in the benchmark stock indices, and this has helped increase the value of pension plan assets. However, it's a mixed picture.
“Interest rates since the end of the first quarter have moved lower, and this is dampening pension plan performance because it requires employers to increase their estimates of plan liabilities.
“The fact that interest rates around the world are at such extraordinarily low levels remains a big issue with many large employers, especially when plans are underfunded and therefore the liability changes outweigh the asset changes."