DB Pension Deficits Have Worldwide Impact, Mercer Says

(September 22, 2010) — New research by Mercer has warned that defined benefit (DB) liabilities around the world are likely to have increased to record levels this year.

The consultancy said this trend is likely to continue, as falling corporate bond yields and volatile equity markets have contributed to a widening deficit among DB plans in most developing economies. In some markets, bond yields have fallen by more than a quarter. Since the end of June 2008, AA corporate bond yields in the US had fallen from 6.97% to just under 5% at the end of August 2010.

“A 50-basis-points fall in discount rates roughly results in a 10% increase in liabilities for a pension scheme,” said Frank Oldham, Mercer’s global head of pension risk consulting, in a release. “As a result, measures of pension scheme liabilities have increased faster than the value of the assets held across numerous markets. The result is even larger deficits on company balance sheets.”

Mercer’s research additionally indicated that regional differences will affect the liabilities recorded. In the UK, benefits are inflation-linked, resulting in slightly greater stability even though deficits stand at historically high levels. In Germany, accounting rules allow companies to average bond yields over seven years, so the impact can appear “more muted”. The story in Canada is more nuanced, Mercer said, as poor investment performance, flat markets in the first half of 2010, and declining AA corporate bond yields drove up liabilities. And in the Netherlands, pension accounting liabilities are based on AA corporate bond yields drawn from the wider European Monetary Union market, where there has been a “significant fall,” Mercer’s research showed.