Human Capital & Careers

U.S. Pension Funding Seen on the Upswing

Higher long-bond yields helped push the funded status of plans here up 1 percentage point in the second quarter, to 89 percent, research finds.
Stephen TaubOctober 19, 2006

The funded status of defined-benefit pension plans throughout the world stayed flat in the second quarter, with U.S. plans showing a slight increase, according to Towers Perrin.

During that three-month period, negative returns in the equity markets were offset by higher long-bond yields, the employee-benefit consulting firm pointed out in a new report.

The United States, Brazil, and the countries that use the Euro saw slight gains, while Australia, Canada, and the United Kingdom saw slight losses.

In the United States, the equity markets lost ground in the second quarter because of sharp dips in the information-technology, consumer-discretionary, and cyclical sectors, according to a press release issued by the firm. Higher bond yields pushed fixed-income returns lower.

But long corporate bond yields have increased a full percentage point, to more than 6 percent in the past 12 months, Towers Perrin noted. Thus, plan sponsors benefited from a 33 basis point rise in the benchmark discount rate. “Liabilities fell as a result, which was more than enough to offset negative asset returns,” according to the firm’s statement.

The net effect was a 1 percentage point rise in the funded status of U.S. plans, to 89 percent.

The third quarter probably boosted the funded status of U.S. pension plans even more, as the equity markets enjoyed their most robust three-month period in several years. In contrast, the second quarter represented the first quarterly decline in equity markets in more than 18 months.

Of the countries analyzed by Towers Perrin, Brazil is the only country whose defined benefit plans are overfunded, to the tune of 103 percent. The most underfunded country is Canada, at 75 percent. At 89 percent, the United States is in the middle, about equal to Euro-zone plans and slightly better than those in the United Kingdom.