The downturn in capital markets during 2001 had a major impact on the financial performance of pension plans around the world reducing typical plan funded levels 10% to 15%, according to Towers Perrin.

The report examines how defined benefit pension plans in major retirement markets worldwide were affected by global capital market changes. The analysis is based on a benchmark plan in each country, with liabilities estimated under accepted international accounting standards.

This is the second straight year of disappointing results for pension plans in the countries studied. When combined with year 2000 results, benchmark plans in the U.S., U.K., Japan and the Euro-zone saw drops in funded levels of approximately 25%. Canada and Australia were the top performers, with two-year losses of around 15%. All the regions surveyed recorded decreases in funded status for their benchmark plans in the last two years, except for a 1% gain in Canada in 2000.

The results in 2001 are a reflection of the combined impact of poor investment results and increasing liabilities. In most of the countries studied, equity returns were negative for the year, and interest rates declined.

“Companies and their employees need to keep these results in perspective,” said Massimo Borghello, principal and a senior actuary in Towers Perrin’s Global Resources Group. “In some countries, relief is available from exceptional years of performance during the boom in capital markets in the late 1990s that enabled many organizations to build up pension surpluses.”

“Still, there’s no question that the fall in stock market values and lower interest rates have combined to prompt many companies sponsoring defined benefit pension plans to look for ways to make sure these plans remain adequately funded and follow sound financial management practices.” Actual decisions about funding, contributions, benefit levels and other key variables will depend on a number of company and plan-specific factors.

Following up on the findings from this quarterly report, Towers Perrin recommends that multinational employers with DB plans consider a number of possible actions. These include reviewing the funded status of individual plans, local contribution requirements and key actuarial calculations, such as those for plan expense under the relevant accounting standard. Companies may also benefit by reexamining each plan’s investment strategy.