The funded status of DB pension plans in Canada, the U.S. and the Netherlands has fallen since December 2011, according to new data from Mercer.
The greatest decline has taken place in the Netherlands, where funded status has dropped from 96% to 80% due to declines in the discount rate used to measure pension liabilities. According to Mercer, as the interest rate used to measure the liabilities has fallen in the eurozone, liabilities across the region have increased. Multinationals with pension obligations in Germany, the Netherlands and Ireland, in particular, will all be facing larger liabilities. Funded status in the U.S. declined from 75% to 73% during the time period, while Canada saw a drop from 87% to 83%.
On the other hand, the Mercer data show that DB plans’ funded status has improved in the U.K. Funded status levels there remained relatively level in the months since December 2011, until September 2012 when there was a sharp improvement to 92%. In the U.K., the yield on high-quality corporate bonds increased, and the market saw a 33% reduction in FTSE350 deficits for the month of September.
“There’s a multitude of risks facing multinationals with only a single DB scheme,” said Frank Oldham, senior partner and global head of Mercer’s DB risk group. “But this data show the scale of the risks and problems facing companies with schemes in multiple geographies. It has not been uncommon for funding levels to move in different directions in some markets over the same month. It is crucial, therefore, that multinationals can monitor their cross-country exposure and react quickly to capitalize on local opportunities.
“For example, a multinational should be able to readily compare a buy-in of the retiree liability in the U.K. with a lump sum cash-out exercise for deferred vested participants in the U.S.—and be ready to execute quickly. We are working with an increasing number of multinationals to help them plan and ready themselves to take action and to monitor the opportunities presented by market movements more proactively.”
While the situation for each multinational depends on how its pension risk is distributed across markets and across asset classes, Oldham said strategies to control the impact of market fluctuations on pension’s earnings are essentially the same across all markets. They cover dynamic investment policies to liability-driven investing to risk transfer strategies, including lump sum cash-outs and annuitization.
“Nevertheless, multinational organizations need to be mindful of the regulatory nuances in each market and the fact that markets are not perfectly correlated, so monitoring needs to take place at a local level,” added David Newman, Mercer’s international consulting leader in New York and multinational DB risk leader.