Despite the strong performance of equities last year, the funded position of pension plans remains quite weak. According to Towers Perrin Global Consulting, the funded position for benchmark plans in the UK and Japan improved by little over 1 per cent last year. In the US and Canada the funded position remained almost unchanged, while the eurozone’s benchmark plan actually fell - by over 5 per cent.
Yet the major equity markets produced low double digit returns for 2004 on the back of falling oil prices, a decisive US presidential election result, increasing corporate mergers and acquisitions activity and healthy corporate earnings.
Nigel Bateman, head of Towers Perrin, warned that multinationals must pay attention to “the general decline in funded ratios and the potential impact of different investment strategies on pension financing and future costs”.
Going into this year, little appears to have changed. In the UK, pension fund deficits for FTSE100 companies stood at £63bn (€90bn) at the end of February, according to Watson Wyatt, the consulting firm. Chinu Patel, partner at Watsons, cautioned that recent rises in equity prices “does not necessarily mean that pension deficits are any less pressing in their importance”.
He explained that while the rise in equity prices in February increased assets by about £3bn, “the continuing increase in inflationary expectations coupled with a marginal decline in corporate bond yields also increased liabilities, leaving the net position a little worse”.
Mr Patel called for pension funds to consider new investment strategies. “They should look at the level of risk they are taking and whether it’s appropriate. They also need to ask if there is some way they could extract more return from the same level of risk, for example by going into so-called alternative investments.”
He added that even improved investment returns might not be enough to pay deficits. “There may need to be a redesign of pension benefits, including a cutback in the future benefits.”
Watson Wyatt has launched a pension deficit index in the hope of raising awareness of this issue and also of the volatility of pension deficit figures, as measured under the FRS17 accounting standard. The index is based on the most recent deficit announcements of companies in the FTSE100 and FTSE350.
But 2004 was not an entirely bad year for UK pension funds, which scored an average return of 10.4 per cent according to Russell/Mellon. The figure puts pension funds back into positive territory over five years. Russell/Mellon also found that the domestic equity weightings of UK schemes fell for the fifth consecutive year in 2004.
RM
