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As they work through budgeting for 2013, multinationals face significant increases in funding expense
The funded status of defined benefit pension plans in the U.S., Canada and major European economies broadly declined in the first nine months of 2012 (January through the end of September), while improvements were seen in the U.K., according to data released by Mercer, an HR consultancy.
The funded status is the percentage of assets vs. liabilities in the plan. In the U.S., the funded status for corporate defined benefit pensions declined from 75 percent to 73 percent, while those in Canada declined from 87 percent to 83 percent. In the U.K., the funded status has, despite fluctuations, remained broadly level over the period until September 2012 when there was an improvement from 89 percent to 92 percent.
The greatest decline took place in the Netherlands, where funded status fell from 96 percent to 80 percent due to drops in the discount rate used to measure pension liabilities.
Typical funding level at year-end 2011
Typical funding level at September 31, 2012
Source: Mercer. These figures represent the average funding levels for companies listed in the S&P 1500 (U.S.), the FTSE 350 (U.K.), the S&P/TSX (Canada) and the AEX/AMX (Netherlands).
The factors driving down funded status are primarily declining discount rates combined with lackluster asset performance.
Discount rates are based on the yields on high-quality corporate bonds denominated in the currency of the liabilities. Multinationals are exposed to movement in discount rates (due in turn to changes in corporate bond yields) across multiple markets.
"As they work through the budgeting process for 2013, U.S. multinationals will likely be faced with significant increases in expense due to changes in discount rates not only in the U.S., but overseas,” said David Newman, international consulting leader at Mercer, in a media statement. “The projected impact of the decline in funded status in these plans will have a significant impact on 2013 earnings,” he predicted.
“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,” noted Newman.
For multinationals operating defined benefit pensions across multiple geographies, it is common for funding levels to move in different directions in some markets over the same month.
“It is crucial, therefore, that multinationals monitor their cross-country exposure and react quickly to capitalize on local opportunities," said Frank Oldham, senior partner and global head of Mercer’s defined benefit risk group.
“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,” Oldham advised.
While the situation for each multinational depends on how their pension risk is distributed across markets and across asset classes, strategies to control the impact of market fluctuations on pension earnings are essentially the same across all markets, Mercer points out. These include
liability-driven investing and risk transfer strategies,
including lump-sum cash-outs and annuitization, which transfers pension risk to private insurers.
In some markets like the U.S., Netherlands and Ireland,
regulators have provided more clarity on the short-term minimum cash requirements, giving plan sponsors more leeway when addressing their pension deficits. While these regulatory interventions may help in the short-term, multinationals need to be mindful of the true underlying deficit, Mercer recommends.
is an online editor/manager for SHRM.
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SHRM Online Retirement Plans Resource Page
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