Double-Digit Equity Growth Worldwide Drives Pension Funding Levels to Their Highest Point in 2005, Towers Perrin Analysis Finds; Third Quarter Results Show Big Increases in Brazil, Japan and the U.S.

STAMFORD, Conn. -- Strong equity returns and higher bond yields in many countries combined to produce the best overall quarter for the funded status of defined benefit plans in more than two years, according to a Towers Perrin analysis of capital market performance and its effect on defined benefit pension plans.

Funding levels of benchmark pension plans increased in all the countries studied during the third quarter of 2005, according to the latest analysis, led by especially large increases in Brazil, Japan and the U.S.

Equity markets continued to benefit from strong performances by energy-related stocks as well as positive economic news, particularly outside the U.S. All of the markets measured in this analysis recorded double-digit equity returns for the 12 months ending September 30, 2005. Bond yield movements varied, but the general movement was higher, resulting in higher discount rates and slightly lower pension liabilities.

"This was one of the best quarters we've seen in a long while," said Martine Ferland, a Towers Perrin principal with the firm's HR Services business Global Consulting Group. "It's been a relatively uncommon phenomenon in recent years for rising bond yields and very strong equity results to combine simultaneously, but it certainly happened in the third quarter. Defined benefit plans around the world clearly benefited from these capital market movements."

At the same time, Ferland cautioned that capital markets are often volatile and that pension plans in many industrial countries remain underfunded. "Multinational companies should continue to be vigilant and critically assess the ongoing financial impact of the general decline in funded ratios and the potential impact of different investment strategies on future pension liabilities, on both a domestic and global level," she said.

The report, Towers Perrin Global Capital Market Update: Third Quarter 2005 Results, examines how DB pension plans in major retirement markets worldwide have been affected by global capital markets. It covers DB pension plans in Australia, Brazil, Canada, the Euro-zone, Japan, the U.K. and the U.S. The impact of capital markets on these pension plans is twofold: on fund assets as a direct result of investment performance and on plan liabilities (as measured under accepted international accounting standards) through the effect of changes in interest rates on economic assumptions.

Key findings for the third quarter include:

--The funding status of DB plans around the world improved noticeably, mainly as a result of very strong investment returns.

--On average, benchmark plans remain substantially underfunded, although capital market movements this quarter helped improve the situation -- most notably in Australia, Brazil and Japan.

--Bond yield movements varied, and discount rates were flat or higher in most markets over the quarter, driven by a general upturn in long-term nominal bond yields that reduced pension liabilities.

--Markets around the world experienced double-digit equity returns over the year ending September 30, 2005.

The following chart shows the percentage change in funded status of benchmark plans by country for the third quarter of 2005 and for the preceding 12 months.

Percentage Point Change in PBO Funded Ratio of Benchmark Plans

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                  Australia  Brazil Canada  Euro-zone* Japan U.K. U.S.
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Third quarter 2005   +3       +12     +1       +2       +8    +2   +5
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Past 12 months       +8       +19     -4       -6       +9    +4   +1
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Funded status        87%      106%    72%      75%      72%   83%  82%
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* The results shown for the Euro-zone are based on typical funded
plans found in Belgium and the Netherlands.

Individual Country Analysis

The following are highlights from the impact of the capital markets on the benchmark pension plans in each country in the third quarter of 2005.

Australia: The Australian stock market surged to record levels, with investors witnessing a 10% return on domestic equities. The natural resource sector continued to drive this growth as commodity prices improved further. Currency movements and fixed interest- returns were relatively flat over the quarter and had little effect on the positive results. Largely in response to expectations that higher energy prices would eventually trigger inflation, bond yields rose both domestically and internationally -- resulting in a reduction in pension liabilities. The combination of lower pension liabilities and higher asset values increased the PBO funded ratio of the benchmark plan to 87% at the close of the quarter.

Brazil: Inflation pressures that plagued Brazil earlier this year subsided marginally in the third quarter, and the country's central bank reduced its lending rate by 25 basis points, to 19.5%. The Brazilian equity markets responded enthusiastically to the rate cut and recovered from a poor first half to post a 25.6% return. Fixed-income investments, which are most often linked to the one-day Treasury rate, benefited from this increase, as did pension plans because the majority of their assets are typically invested in these types of securities. Although short-term interest rates declined, long-term interest rates rose in the third quarter, resulting in a higher discount rate and thus lower pension liabilities. The combined effect was an increase of 12 percentage points in the funded status of the benchmark plan, resulting in the PBO funded ratio moving above the fully funded level to 106% as of September 30, 2005.

Canada: The Canadian equity markets experienced strong growth again in the third quarter as the energy and utilities sectors continued to benefit from rising oil prices and the impact of the U.S. hurricanes on already tight global oil supplies. However, the rising value of the Canadian dollar hampered returns for unhedged domestic investors, leading to only modest international equity returns overall. In contrast to most other markets, Canada's bond yields declined slightly, prompting a reduction in the benchmark discount rate for a fifth consecutive quarter, to 5.05%, and an increase in pension liabilities. Overall, higher asset values outweighed the impact of the increase in liabilities, and the PBO funded ratio rose slightly from 71% to 72%.

Euro-zone: Equity markets in the Euro-zone continued to post strong gains in the third quarter, boosted by improved business confidence and positive results from the manufacturing sector, particularly in Germany, although most economic indicators continue to point to a slower growth outlook for the region. Foreign equity investments performed well and were supported by a minor depreciation of the euro. Bond yields saw little movement over the third quarter, which left pension liabilities unaffected and the benchmark discount rate unchanged at 3.9%. Strong returns in the Euro-zone equity markets resulted in a 2 percentage point improvement in the PBO funded ratio of the benchmark plan, to 75%.

Japan: The Koizumi administration's landslide reelection in September encouraged large numbers of investors to return to the Japanese equity markets with the hope that the government would continue to pursue structural reforms. Soaring stocks brought a return of 20.5%, leading to the strongest performance for pension plan assets since the second quarter of 2003. International equity returns were also positive, but to a lesser degree, and unhedged investors benefited from an appreciation of foreign currencies against the yen. Long-term nominal bond yields rose to their highest levels in 12 months, and the Bank of Japan continued with its zero interest-rate policy. Overall, the PBO funded ratio of the benchmark Japanese plan jumped to 72%, up a full 8 percentage points from the second quarter.

United Kingdom: British equity markets posted solid gains and returned 8.2% in the quarter, primarily driven by investor optimism following the rate cut by the Bank of England and strong company-specific earnings reports. DB plans benefited from these positive investment returns, and the PBO funded ratio rose 2 percentage points, to 83%, by the close of the quarter. Movement in bond yields caused the benchmark discount rate to be revised slightly upward. Under normal circumstances, this would reduce pension liabilities, but in the third quarter this effect was offset by a slight rise in the salary inflation rate.

United States: The funded status of DB plans in the U.S. improved in the third quarter largely because rising interest rates reduced liabilities for plan sponsors. The upturn in rates reflected the Federal Reserve's shift to a tighter monetary policy and heightened concerns over energy prices, resulting in higher bond yields and negative returns across all maturities. Domestic equity returns were positive despite the damaging hurricane season and the impact of higher energy prices on consumer spending. International equity returns over the same period were significantly stronger. While higher bond yields had a negative impact on pension assets, this was more than offset by relief on the liability side of the balance sheet, and the combined effect resulted in a 5 percentage point improvement in the PBO funded ratio of the benchmark plan to end the quarter at 82%.

About Towers Perrin

Towers Perrin is a global professional services firm that helps organizations improve their performance through effective people, risk and financial management. Through its HR Services business, Towers Perrin provides global human resource consulting that helps organizations effectively manage their investment in people. Areas of focus include employee benefits, compensation, communication, change management, employee research and the delivery of HR services. The firm's other businesses are Reinsurance, which provides reinsurance intermediary services; and Tillinghast, which provides management and actuarial consulting to the financial services industry. Together, these businesses have offices and business partner locations in 25 countries. More information about Towers Perrin HR Services is available at www.towersperrin.com/hrservices.