Hewitt monitors and analyzes daily pension funding levels of U.S., U.K., Continental European, and Canadian companies in the S&P 500, FTSE 350, DJ Euro Stoxx 50, and TSX, respectively, through its Pension Risk Tracker tool. Hewitt found that the overall funded status of pension plans in these regions was 80 percent at the end of the second quarter of 2010, 7 percent lower than the funded status levels at the end of the first quarter (87 percent). This translates to about $500 billion global pension deficit. According to Hewitt’s estimate, global pension assets fell by $91 billion in the quarter, while pension liabilities increased by $106 billion over the same period.
“After solid performance in April, global equity markets fell meaningfully in May and June, which drove down pension asset levels. This, coupled with higher liability valuation due to falling interest rates, further worsened the health of defined benefit plans globally,” said Ari Jacobs, Hewitt’s North American Retirement Solutions leader. “As market volatility around the world continues, companies need to carefully monitor both the asset and liability side of the equation and understand how they intersect. This approach will enable companies to respond more quickly to swings in the market and help them make decisions that optimize risk and return.”
Regional Analysis
Not surprisingly, this market volatility contributed to across-the-board decreases in pension funding levels in the U.S., the U.K., across Europe, and in Canada.
United States
Of all the regions, U.S. companies in the S&P 500 saw the most notable decrease in pension funding levels in the second quarter, dropping from 90 percent at the end of March 2010 to 80 percent at the end of June 2010. This is primarily due to a 10 percent to 15 percent decline in equity markets and the lowest corporate bond rates in five years.
“Pension assets and liabilities diverged this quarter, but unfortunately it was in the opposite direction of what U.S. plan sponsors would have preferred,” said Joe McDonald, Hewitt’s Global Risk Services leader in the U.S. “Continued market volatility warrants plan sponsors to develop programs to better manage the funded status risk of the plan. We see tremendous interest from clients for customized solutions, such as dynamic investment policies, that integrate a plan’s asset allocation decision with the funded ratio and helps companies protect their balance sheets from volatile swings in the funded position of their pension plans.”
United Kingdom
Accounting deficits increased amongst companies in the FTSE 350 index in the U.K. during the second quarter of 2010, with assets declining by about 4 percent and accounting-based liability values staying flat. The average funded ratio dropped from 86 percent at the start of the quarter to around 82 percent and is now close to the lowest value Hewitt has recorded since it began tracking the data in January 2007. The failure of assets to match the growth in liabilities so far in 2010 makes it even more likely that companies will continue to look for solutions to cap or even reduce their accrued liabilities.
Kevin Wesbroom, Hewitt’s Global Risk Services leader in the U.K., said, "We expect no let up in the months ahead as companies are forced to take significant benefit actions–such as freezing of plans to existing members, caps on pensionable pay and liability management exercise such as Enhanced Transfer Value (ETV) exercises and Pension Increase Exchange (PIE) options."
Continental Europe
Pension funding levels of companies in the Eurozone were also subject to unfavorable market conditions during the second quarter of 2010. The combined pain of falling asset values and the increase in liabilities due to declining bond yields led to the average funding ratio dropping from 72 percent at the start of the quarter to 66 percent at the end.
Matt Wilmington, leader of Hewitt’s European Risk Services Team, said, "On top of the extreme volatility over the past couple of years, this additional hit will further focus companies’ minds on managing pension risk. In the coming months, we expect to see even greater interest in enhanced asset-liability matching strategies, as well as benefit design changes, benefit reductions and a growing appetite for longevity hedging as companies aim to put that volatility to bed once and for all."
Canada
Pension funding levels also fell for Canadian companies in the TSX, from 99 percent at the end of March 2010 to 95 percent at the end of June 2010. Significant market volatility in the region, including a combination of poor equity returns and declining corporate yields were major factors in the decline of funding levels.
Looking ahead, Canadian pension plan sponsors can continue to expect a rocky road, according to Rob Vandersanden, a principal in Hewitt's Calgary office. "Canada’s transition to International Accounting Standards in 2011 means the funding position of the plan will sit directly on the company’s balance sheet. With this continued market volatility, organizations need to be vigilant about monitoring the risk factors that impact investment returns—such as interest rates, currency exchange rates and inflation—and adjust their strategies to address the changing landscape," he said.
