Global pension plans had mixed results in the first quarter, with funded ratios declining in the U.S., Canada, Australia and the euro zone but improving or holding steady in the United Kingdom, Brazil and Japan, according to a new report from Towers Perrin HR Services.
Global equity markets were generally higher in the first quarter, although signs emerged that the two-year trend of above-average returns was slowing. At the same time, long bond yields, which are typically used to determine pension plan discount rates, were steady or lower, increasing pension liabilities.
The projected benefit obligation funded ratio of Towers Perrin's benchmark U.S. pension plan slipped two percentage points in the first quarter to 63%, from 65% in the fourth quarter 2004. While Towers Perrin adjusted the benchmark discount rate down only slightly, to 5.79%, negative investment returns — weak stock prices and mixed bond prices — was the main factor driving the funded ratio down.
In the United Kingdom, equity returns helped offset weak bond prices, but overall investment returns still fell below long-term expectations. Towers Perrin revised its benchmark discount rate up 11 basis points to 5.4%, which effectively lowered pension liabilities, but given the modest investment return, the benchmark pension plan funded ratio was unchanged at 60% in the first quarter.
For the second straight quarter, Japanese stocks produced solid gains while slightly lower bond yields helped fixed-income investments post marginally positive returns. The benchmark discount rate was unchanged, which, combined with the investment returns, produced a one percentage point gain in the benchmark pension plan funded ratio to 68%.
The funded ratio of the benchmark pension plan in Australia fell one percentage point to 82% in the first quarter as solid investment returns were offset by a 25-basis-point increase in the benchmark discount rate. Australian equities posted strong returns while fixed-income investments were slightly higher in the period.
Brazil continued to have the strongest funded ratio, which remained unchanged at 125% in the first quarter. A central bank short-term interest rate increase during the period helped fixed-income investments post gains while equity investments ended a volatile quarter slightly higher. The majority of pension assets are invested in short-term bonds, which benefited from the rate hike.