Japanese defined benefit pension funds entered the tumultuous third quarter of 2008 in relatively
strong position, with average funding ratios of better than 100%, according to the results of Greenwich Associates 2008 Japanese Investment Management Study. However, an emerging shortfall between the current actuarial earnings rate and expected return on plan assets suggests serious challenges ahead.
As of the second quarter of 2008, Japanese corporate DB pension funds had an average funding ratio of 102% and public DB plans were reporting an average 95% funding ratio. Overall, 37% of Japanese DB pension plans reported funding ratios over 100%, while 60% had ratios over 90%.
Across the board, funding ratios were modestly lower than those seen in 2007, but in light of the significant declines in Japanese equity markets over the 12 months covered in our research, pension funds adapted quite well over a very difficult period, says Dev Clifford, Greenwich Associates consultant.
The success of Japanese plan sponsors at sustaining their funding ratios from 2007 to 2008 can be attributed in large part to their efforts over the past several years to reduce portfolio volatility and secure their plans overall health. DB plan sponsors in Japan went through a lot of hard work and pain to get themselves to improved funding ratios, says Abhi Shroff, Greenwich Associates consultant.
Expected Returns on Plan Assets Fall Short of Actuarial Mark Even before markets slid into the current damaging phase of the global financial crisis, Japanese pension plan sponsors were anticipating greater difficulties in meeting return targets. Plan sponsors increasing reliance on lower volatility fixed-income investments and lower equity exposures has led them to project a 100 basis point shortfall between their current actuarial earnings rates and actual expected rates of return on plan assets. And projections on overall expected rates of return on plan assets as of Q2 2007 were buoyed by expectations for relatively strong investment returns. Needless to say, with the market events of September and October, those expectations have been called into question for this year, says Dev Clifford.
Although the 100 bps gap between expected ROR and the current actuarial rate represents the first time in recent memory that plan sponsors have experienced such a shortfall, the allocation shifts that led to current return expectations appear to have improved plan sponsors positions leading into the market dislocations of fall 2008. Over the past three years, plan sponsors and other financial institutions in Japan have markedly reduced their equity exposure while boosting their commitment to fixed-income investments. Among corporate plans, allocations to active and passive equity declined to 37.2% of total assets in 2008 from 43.2% in 2007 and 44.5% in 2006. Over the same period, domestic fixed-income allocations increased to 38.8% of assets from 5.2% and 34%. The shift was even more dramatic among public funds, who cut equity holdings to 26% of assets in 2008 from 28.4% in 2007 and 32.9% in 2006, while increasing domestic fixed-income assets to 70% of assets this year from as little as 62.9% as recently as 2006.
To read the full report please visit www.greenwich.com
D.C.