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March 14, 2001
Pension Plans Experience Worst Performance in a Decade
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bal capital markets results for 2000 had a negative impact on pension plan financial performance and reduced plan funded levels by 10 to 15 percent in a number of major countries.

According to a report from Towers Perrin, the impact of the financial market activity on pension plan performance was twofold: directly on fund assets and indirectly on liabilities from required changes in economic assumptions to meet accounting requirements. Liabilities represent each company's obligation to pay employee retirement benefits.

"For many multinational companies, their pension plans worldwide during 2000 experienced the worst financial performance in a decade. With few exceptions global equity returns disappointed, while lower interest rates resulted in higher pension plan liabilities," said Massimo Borghello, principal and a senior actuary in Towers Perrin's Global Resources Group.

"But," he added, "last year's results also have to be taken in the context of earlier years, when strong returns in global capital markets helped boost plan funded levels and enhanced the overall security of company-sponsored plans."

The results of the analysis showed that the average change in reported funded levels in 2000 varied among the countries examined, based on a benchmark plan.

There was a 10 percent decline among pension plans in the U.S., the U.K. and the Eurozone, reflecting negative contributions from equity allocations in these countries. Australia showed a 15 percent decline. Conversely, Canada experienced only a slight decline due to strong fixed income results that helped offset declines in equity values. (The "Eurozone" is made up of countries that joined the European Monetary Union, including Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain.)

Actual results for any company's pension plan will depend on plan design, asset allocation, demographic issues, reporting currency and other specific factors.

"Companies should carefully review their pension plans to determine what adjustments they may need to make to account for the impact of what happened in capital markets last year," said Borghello. "This will be especially true for multinationals that have pension plans with significant assets and liabilities in countries around the world."

Given the findings from this report, Towers Perrin recommends that multinational companies should proactively manage pension reporting to meet their business objectives and should consider the following steps in 2001:

  • Conduct a detailed review of the 2001 pension expense (or budget expense) calculations to ensure that any early warning signs are addressed in a timely fashion.

  • Review the broad set of actuarial assumptions, taking the opportunity to revisit both the positioning (e.g., more or less conservative) of financial assumptions and the use of other financial and demographic assumptions, such as salary increases, return on assets and demographic assumptions.

  • Maintain a continued focus on ensuring that worldwide pension plan asset allocations are consistent with plan liability profiles and business objectives.

  • Conduct a review of the year 2000 investment performance of local pension plans to highlight areas for continuous improvement vis-a-vis overall objectives and benchmark comparisons.

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