US - A new report has found that defined benefit pension funds worldwide have been hit by declining capital markets, and that the situation may have “potential balance sheet implications”.
The report, by US-based consultant Towers Perrin, says that the decline in worldwide markets in the third quarter of 2002 led to further reductions – ranging from 6% to 17% - in the funded levels of benchmark company pension plans.
The report surveyed defined benefit plans in Europe, the US, Japan, Canada and Australia.
“These results show further declines in the funded levels of pension plans worldwide,” says Leon Potgieter, head of Towers’ global consulting group. “Unless this trend is reversed, companies may be facing increased cash contributions and pension expense that could have potential balance sheet implications.”
Towers says that the impact of falling markets on pension plans is twofold. Firstly there is an impact on fund assets as a direct result of investment performance, Secondly, there is an effect on plan liabilities via changes in interest rates on economic assumptions.
“Already, we’re seeing some large multinational companies moving to add cash to their plans in order to rebuild funding levels,” Potgieter adds. “We’ve also seen a movement in Europe to adjust the composition of pension plan portfolios by reducing the proportion of assets in stocks.”
The report cites the euro-zone as having had the worst performing domestic equities in the third quarter, of all the regions in the survey. It says the market fell by 29% in the quarter, and by a total 40% in the year to date. The UK saw comparable falls of 12% and 17%.
The report adds that plan portfolios worldwide posted negative investment returns in both the quarter and the year to date. Asset allocation “had a major impact” on actual investment returns in individual plans, it added. Liabilities rose in the period under review due to decreases in long-term bond yields.