Fueled by a robust equities market and rising interest rates, the funded status of pension plans sponsored by large companies improved sharply in 2013, according to two surveys released Thursday.
On average, pension plans sponsored by companies in the S&P 1500 were 95% funded at year-end 2013, according to New York-based Mercer L.L.C. That's up from 93% at the end of November and a 21 percentage point increase from year-end 2012.
Similarly, a Towers Watson & Co. analysis of pension plans sponsored by Fortune 1000 companies found that the plans were an average of 93% funded at year-end 2013, up from 77% a year earlier.
At 93%, the Fortune 1000 plans' average funded level is the highest since 2007 when big companies' plans were, on average, 106% funded. In 2008, though, plan funding plunged to an average of 77% as the equities market fell sharply and the economy headed into what later became known as the Great Recession. Between 2008 and 2012, the average annual funded levels of pension plans sponsored by Fortune 1000 companies ranged from a low of 77% to a high of 84%., according to Towers Watson.
“As a result of the funded status improvement, funding ratios are now at their highest levels since the financial crisis of 2008, but still well below 100%, a level reached only three times since 2000,” Alan Glickstein, a Towers Watson senior retirement consultant in Dallas, said in a statement.
In all, the plans analyzed by Towers Watson had $1.508 trillion in liabilities and $1.409 trillion in assets in 2013, for a funding shortfall of $99 billion. That compares with a funding deficit of $384 billion in 2012, when the plans had $1.672 trillion in liabilities and $1.288 trillion in assets.
Similarly, the Mercer analysis found a collective funding deficit of $103 billion at year-end 2013, a huge drop compared with year-end 2012, when the plans had a $557 billion funding deficit.
Focus on risk-transfer strategies
With the sharp improvement in plan funding, Mercer said it expects more employers to de-risk their plans such as transferring the liabilities to commercial insurers by buying group annuities, as well as offering certain plan participants the opportunity to convert their monthly benefits to a cash lump sum.
This “is looking to be a big year for risk transfer strategies such as annuity buyouts and voluntary cash-outs to former employees, as improving conditions make these options much more feasible than before,” Richard McEvoy, leader of Mercer's financial strategy group in New York, said in a statement.
Through de-risking strategies, which shrink the number of people in pension plans, employers face less exposure to the risk of having to sharply boost their plan contributions, such as when interest rates decline or investment results slump.
In addition, by shrinking their plans, employers pay smaller mandatory premiums to the Pension Benefit Guaranty Corp.
Under legislation Congress approved late last year, the base premium, currently $49 per plan participant, will rise to $57 in 2015 and $64 in 2016. The legislation, which President Barack Obama signed into law last month, also sharply increases the additional PBGC premium paid by employers with underfunded plans.