One of the fiscal implications of the current financial crisis is the effect on funded pension plans in many OECD countries. Some of the countries’ pension fund portfolios have high exposure to equities and mutual funds. Many of the mutual funds in these countries are also heavily invested in equities.
The following diagram shows the Pension Plan Assets held by Country as of 2007 end (click to enlarge):
Source: IMF
Research Paper: The State of Public Finances: Outlook and Medium-Term Policies After the 2008 Crisis published March 6,2009
The stripped circles in the above figure shows that 16 countries have pension fund investments in equities and mutual funds greater than 10% of GDP. The countries with high exposure to stocks are Australia, the U.S., Canada, Iceland, The Netherlands, Switzerland, Denmark, and the U.K. Of the emerging market countries South Africa, Chile, and Brazil are more exposed. Countries such as Mexico, Argentina and Norway have limited exposure to the equity markets.
In the US, the asset base of pension plans for the various government workers is huge. At the end of October 2008, the $4 Trillion assets held by these plans had fallen by roughly $1 Trillion. As these plans are defined-benefit plans, the governments will make efforts to fill the gap in the future years either by raising the contributions from current employees or by raising taxes. However this does not affect the social security plan since those assets are not invested in the markets.
If employers go under taking the defined-pension plans with them, then the Federal agency Pension Benefit Guaranty Corporation (PBGC) guarantees payment to plan participants. However this creates a huge liability for the federal government.
According to a Mercer study in the US, the pension plans of the S&P 1500 companies have lost half a Trillion $ in 2008, of which 80% was lost in the last quarter.
