The funded status of defined benefit pension plans in the U.S., Canada and the Netherlands has declined since the end of 2011, according to new data from Mercer, but the United Kingdom's DB plans have seen some improvement.
The funded status of the Netherlands fell from 96 percent to 80 percent due to drops in the discount rate used to measure pension liabilities. The Netherlands isn't alone, Mercer said. Multinationals with pension obligations in Germany and Ireland also will be facing larger liabilities.
The funded status of the UK's DB plans remained steady until September when it took a sharp jump to 92 percent. Those in the U.S. declined from 75 percent to 73 percent, while those in Canada declined from 87 percent to 83 percent. The cause of movement in each market is primarily declining discount rates combined with lackluster asset performance. The UK increased because the yield on high quality corporate bonds increased and the market implied long-term inflation reduced leading to a 33 percent reduction in FTSE350 deficits for the month of September.
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"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 shows 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 UK, with a lump sum cash-out exercise for deferred vested participants in the US – 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 pro-actively."
An analysis of the Eurostoxx 600 by Mercer in July highlighted the scale of pension risk facing multinationals in Europe. The report showed that while corporate earnings have increased since 2008, DB pensions continue to cause a significant dilution of company earnings and are now larger relative to market capitalization than in 2006. Pension expense now accounts for about 10 percent of earnings and pension deficits represent 4.8 percent of market cap in 2010/11 compared to 2.9 percent in 2007/08.
"If these deficits continue to worsen," said Oldham, "the cost of maintaining pensions for multinationals or organizations with operations in the UK will shoot up. No executive wants to be worrying more about the pension scheme than the business, so risk management is vital."
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