According to a report by WTW, global pension funds saw mostly positive performance in the second quarter, with the notable exceptions of the United States and Brazil. These returns came at a time of high volatility in global markets, which saw record inflation, weak equity markets, fluctuating exchange rates and rising interest rates. While such volatility exists across the globe, the United States appears to have been particularly hard hit: it posted the lowest returns of any country listed in the second quarter in WTW’s Global Pension Finance Watch study.
The WTW Repo Index shows the U.S. falling 1.3% in the quarter, up from a 9.2% year-to-date return, which is the third-lowest return. lower pension funds in the report.
The WTW Retirement Index is the ratio of the market value of assets to the projected benefit obligation for a hypothetical reference plan.
While the factors contributing to the performance of US pension plans are known around the world, they are magnified in the United States for a number of reasons, according to the WTW report. One of the main pressures on US pension funds is the percentage of fund assets that are held in equities. While countries around the world have seen a dramatic decline in equity performance, it has been much more pronounced in the United States. the two second highest regions in terms of assets held in equities, Canada and the eurozone, account for only 40% of total funds invested in equities. Additionally, the vast majority of equity investments by US pension funds are in domestic equities, making US pension funds vulnerable to this downturn, the WTW report said.
While generally a sanctuary for cautious investors in uncertain times, US bonds are also unlikely to provide a safety net for beleaguered investors. Interest rates remained relatively high for US government bonds in June, compared to other countries and regions covered in the WTW report. The 30-year Treasury bill rate was 3.14% in June, while the 10-year bill was 2.98% and the three-month bill was 1.72%. This is coupled with a rate of 4.48% for long-term AA-rated corporate bonds and a benchmark discount rate of 4.84%.
This discount rate, the third highest in the report after those in Brazil and Canada, is particularly noteworthy, as US pension plans also tend to have some of the lowest durations in the world. Nathan Pavik of WTW attributes this to a few factors, including shorter lifespans and less public funding for pensions in the United States, as well as a failure to account for inflation in their benefit plans, what most countries do. Thus, despite high discount rates, there is no corresponding decline in liabilities. This all added up to a tough quarter for the US in the WTW index.
The rest of the countries or regions listed in the WTW report fared better, with the exception of Brazil. While stock markets were weak around the world and investment returns were modest for all countries, corresponding increases in discount rates generally offset liabilities enough to allow increases in pension indices. most countries.
The UK posted negative investment returns in the second quarter, with its benchmark portfolio down 12.6%. This was offset by relatively low interest rates, with a rate of 2.23% for 30-year government bonds, a rate of 2.56% for 10-year bonds and a rate of 1. 19% for three-month bonds. Combined with a benchmark discount rate of 3.68%, this resulted in a decrease in liabilities and an overall increase of 9% in the WTW index.
Switzerland also posted negative investment returns in the second quarter, with its benchmark portfolio down 8.5%. This was offset by relatively low interest rates: 1.32% for 30-year government bonds and 1.04% for 10-year bonds. Information on three-month bonds was not available for Switzerland. A discount rate of 2.03% caused liabilities to fall to the point where the country posted a 9.9% gain in the pension index.
Japan experienced less dramatic losses in the second quarter, with a 1.9% decline in its benchmark portfolio. This was offset by relatively low interest rates, with a rate of 1.28% for 30-year government bonds, a rate of 0.30% for 10-year bonds and a rate of -0 .14% for three-month bonds. Combined with a benchmark discount rate of 1.85%, liabilities decreased and the pension index increased by 3.8%, according to the WTW report.
The euro zone recorded a 7.7% decline in its benchmark portfolio over the period. This was offset by relatively low interest rates, with 1.6% for 30-year government bonds, 1.37% for 10-year bonds and -0.48% for three-month bonds . With a benchmark discount rate of 3.38%, liabilities decreased and its pension index increased by 22.4% for the second quarter.
Canada saw a 12.2% decline in its benchmark portfolio in the second quarter. This was combined with relatively high interest rates, with 3.14% for 30-year government bonds, 3.23% for 10-year bonds and 2.10% for three-month bonds. . However, when offset by a high benchmark discount rate of 4.99%, the WTW index for Canada showed an increase of 1%.
Brazil posted the largest losses last quarter, with the benchmark portfolio down 12.6% for the period. This was combined with high interest rates, with 6.03% for 30-year government bonds, 6.21% for 10-year bonds and 13.47% for three-month bonds. Combined with a high discount rate of 10.27%, this resulted in a 1.1% drop in the WTW Repo Index for the second quarter.
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Tags: Discount rate, global pensions, Liabilities, Pension