Health of Corporate DB Plans Improves

The financial health of the largest U.S. corporate defined benefit (DB) pension plans improved during 2013, says a new analysis.

Professional services firm Towers Watson finds that in 2013, DB funding improved to a level not seen since the start of the financial crisis. The analysis cites rising interest rates lowering liabilities, as well as moderate investment returns, as the primary reasons for the overall improvement.

The analysis of year-end corporate disclosures found that the pension deficit for the 100 largest pension sponsors among U.S. publicly traded organizations fell 57%, from $295.5 billion at year-end 2012 to $125.9 billion at year-end 2013, a decrease of $169.6 billion. The pension deficit for these companies has not been this small since 2007, according to Towers Watson, when plans had a surplus of $82.3 billion.

The overall average funded status of these plans jumped 13% during the year, from 78% at the end of 2012 to 91% at the end of 2013. The analysis cites this as being the best funding level since the end of 2007, when the average large corporate DB plan was 103% funded. Additionally, the number of plan sponsors in this group with fully funded plans surged from five at the end of 2012 to 22 at the end of 2013. At the end of 2007, half of these 100 plans were fully funded.

“Plan sponsors made great strides to shore up the financial condition of their pension plans last year,” says Dave Suchsland, senior consultant at Towers Watson in New York. “The rising stock market, combined with higher interest rates for the first time in five years, pushed funding levels significantly higher. This is good news for employers, as stronger pension fund balance sheets will reduce required cash contributions in the near term while lower pension costs will improve corporate earnings.”

The analysis also finds that companies continued to contribute relatively large amounts to their plans during 2013, with the plan sponsors’ median contribution being 60% more than the value of benefits accruing during the year. However, the contribution levels were much lower than in prior years. For 2013, plan sponsors contributed $27.8 billion, down from $45.2 billion in 2012. This is the smallest contribution since 2008, when companies added $16.8 billion to their plans. After many years of making large contributions, some plan sponsors took contribution holidays or decided to contribute significantly less in 2013. Six of the 10 largest cash contributors in 2012 pumped $11.3 billion into their plans, compared with $0.8 billion in 2013.

“It will be interesting to see how the improved funding levels, if sustained, and overall financial health of pension plans will affect plan sponsors’ pension de-risking efforts in 2014,” says Alan Glickstein, senior retirement consultant at Towers Watson. “The improved funded position, combined with recent increases in Pension Benefit Guaranty Corporation premiums and a newly released Society of Actuaries mortality study and tables, will make de-risking actions very attractive in 2014.”

Other findings from the analysis include:

  • Investment returns. During 2013, market returns outperformed expectations at the beginning of the year for most plan sponsors, with average investment returns at 10.8%;
  • Investment allocations. Plan sponsors have been gradually shifting asset allocations from public equities to fixed income and alternative investments to reduce investment risk relative to liabilities. Since 2009, average allocations to public equities have fallen by 12%, while allocations to fixed-income investments have risen by almost 9%; and
  • Discount rate. After falling for four years, the average discount rate increased 83 basis points, from 4.02% in 2012 to 4.85% in 2013. Interest rates still remain more than 150 basis points lower than in 2008.

The analysis was based on U.S. pension disclosures for the 100 largest pension plan sponsors among U.S. publicly traded companies with year-end 2013 fiscal dates, ranked by amount of plan liability at the end of 2012.

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