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Towers Watson: Pension Funding Levels Declined in All Major Global Markets in 2011

Posted on 13 Feb 2012

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Despite some improvements in the fourth quarter of 2011, pension funding levels in major global markets dropped over the year due to declining discount rates and disappointing asset returns, according to Towers Watson’s latest Pension Index.

Although the fourth quarter of 2011 experienced generally positive asset returns, the beneficial impact was largely offset by continuing declines in discount rates. As a result, overall movements in the Pension Index for the quarter were relatively small and mixed, ranging from a fall of 2.7% in the U.K. to a 4.4% increase in the U.S. The Towers Watson Pension Index is a measure of funded ratio based on the projected benefit obligation (PBO) for a benchmark pension plan. The Pension Index is tracked across seven markets: Brazil, Canada, the Euro-zone, Japan, Switzerland, the United Kingdom and the United States.

“In recent years, defined benefit pension plans have been doubly hit by unfavorable asset performance and declining interest rates,” said Christine Farmer, senior international consultant. “And 2011 was no exception. We expect these economic trends to cause employers to continue to evaluate their overall retirement benefit plan risk management strategies.”

Of the seven markets, the Canadian Index had the largest decrease, declining by approximately 16% for the year. The U.S. registered the next-largest decrease, at nearly 12%.

“In the U.S., a positive fourth quarter investment return reversed much of the third quarter’s losses, but was not enough to offset the effect of the continuing decline in bond yields over the year,” said Jerry Mingione, senior retirement consultant. “Both corporate and government yields ended the year at near-historic lows, in part due to government interventions designed to stimulate the economy, causing problematically high liability growth.”

The U.K. Index also dropped significantly, by almost 9%. Asset returns were positive over the year; however, discount rates, which had been close to flat for the first three quarters, declined significantly in the fourth quarter.

About Towers Watson Pension Index

Towers Watson tracks the performance of a hypothetical pension plan that is intended to be representative of the pension liabilities and plan assets (including asset mix) that are typically found in each global market. The Towers Watson Pension Index measures the PBO funded ratio (the ratio of the market value of assets to the projected benefit obligation). Asset values change based on the investment performance of the benchmark portfolio, assumed contributions and benefit payments. Liability values change with accumulated service cost and interest, benefit payments and the effect of any changes in financial assumptions. Contributions are assumed to be equal to the service cost for each benchmark plan, so that the Pension Index captures the impact of capital market results.