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Pension Funding Levels Rise at Year-End

Assets in defined-benefit plans enjoyed a strong fourth quarter thanks to increased returns from overseas stock investments, compounded by the depreciation of the dollar, according to a recent report.
Stephen Taub, CFO.com | US
March 23, 2005

The year-end stock-market rebound helped to increase the funded status of pension plans in most major retirement markets worldwide, according to a recent report from Towers Perrin.

In the United States, assets in defined-benefit plans enjoyed a strong fourth quarter thanks to increased returns from overseas stock investments, the value of which was compounded due to the depreciation of the U.S. dollar. Domestically, added Towers Perrin, small-cap and technology investments were the best performers, and bond returns were relatively flat.

The strong year-end finish is reassuring to not only the individuals who are counting on these assets when they retire, but to the Pension Benefit Guarantee Corp., which would be called upon to take over these plans if they failed. The PBGC is already feeling strained by the termination of a number of airline-union pension plans earlier this year.

Overall, positive asset returns outweighed increased liabilities, and the funded ratio of the benchmark U.S. plan improved 2.5 percentage points, to 65 percent, said Towers Perrin. The consultancy pointed out, however, that for the full year, the funding level remained relatively flat when compared with 2003.

Leon Potgieter, a Towers Perrin principal, noted that "Even with two consecutive years of outstanding returns in the equity markets, the overall effect of capital market movements on the funded status of pension plans has been only marginally positive." The reason: Continued low yields for long-term bonds, which result in low discount rates for pension liabilities, offsetting positive investment results.

"Multinational companies should continue to assess their pension investment strategies at both the local and global level, while also critically analyzing the impact the general decline in funded ratios may have on their future earnings," Potgieter counseled.




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