Index results for benchmark corporate pension plans in five major regions fell in the third quarter because of falling interest rates and modest investment returns, said Towers Watson's quarterly report.
The eurozone had the biggest decline, dropping 5% in the quarter to 65.3 in the Towers Watson Pension index, implying a similar percentage decline in funding ratio.
“The Towers Watson Pension Index tracks the asset and liability performance of a hypothetical pension plan against market conditions,” said Rohit Chhiba, senior international benefits consultant at Towers Watson, in an e-mail. “The absolute value of the index is not necessarily representative of funding levels of pension plans in a specific region. (A) change in the index indicates how market conditions may affect funding levels in that region.”
In the third quarter, U.S. plans decreased 2% to 73.5; U.K., 1.9% to 76.5, Switzerland, 1.2% to 99.5; and Canada, 1% to 66.8.
“Eurozone is one (region) that has seen tremendous amount of volatility,” Mr. Chhiba in a telephone interview. A 39-basis-point drop in the discount rate during the quarter outweighed investment returns of 2.7%, resulting in the decline.
In the U.S., falling equity markets drove the decline quarter over quarter, while a 59-basis-point drop in the discount rate drove the year-to-date decline, Mr. Chhiba said. Year-to-date, U.S. corporate index values are down 6% from its Dec. 31 level of 78.2. Investment returns over the quarter were -0.7%.
“We continue to see immense volatility in capital markets across the globe, especially if you look at September and October” Mr. Chhiba said. To mitigate these risks, plan sponsors might want to consider adopting liability-driven investing or other derisking strategies, Mr. Chhiba said.
Only two of the seven regions studied saw index values increase in the third quarter. Brazil and Japan's index results rose 3.2% and 2.6% to 101.7 and 67.8, respectively.
Brazil had a positive investment return of 5.9% in the third quarter and fairly flat movement in the discount rate, which contributed to the increase, Mr. Chhiba said.