Fueled by robust investment returns and higher interest rates, funding levels of the largest U.S. corporate pension plans surged in 2013, Towers Watson & Co. said Thursday.
The New York-based benefit consulting firm's analysis of financial statements filed by sponsors of the 100 largest pension programs found that plans on average were 91.2% funded at the end of 2013, up from 2012's average 77.9% funded level. Pension plan size was based on plan liabilities at the end of 2012.
At just over 91%, plan funding levels were highest since 2007 when the plans on average were 103.3% funded. Pension funding levels tumbled the following year to an average of 79.2% as equity markets swooned during the Great Recession.
Since then, average funding levels have stayed in a fairly narrow range until last year's jump of more than 13 percentage points.
In addition, 22 employers had fully funded plans at the end of 2013, up from just five at the end of 2012.
“The rising stock market, combined with higher interest rates for the first time in five years, pushed funding levels significantly higher,” Dave Suchsland, a senior consultant in Towers Watson's Philadelphia office said in a statement.
“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,” he added.
Investments, interest rates, contributions
Investment returns averaged 10.8% in 2013, down slightly from 12.5% in 2012, but up sharply from 4.8% in 2011.
In addition, average interest rates jumped by 83 basis points in 2013 to 4.85% from 4.02% in 2012. Higher interest rates have the effect of lowering the value of plan liabilities.
Employers, though, contributed less to their plans. In 2013, employers contributed $27.8 billion, down from $45.2 billion in 2012.
“After many years of making large contributions, some sponsors took contribution holidays or decided to contribute significantly less in 2013,” according to the analysis.
In all, the plans had an aggregate funding deficit of $125.9 billion, down dramatically from $295.5 billion in 2012, a decrease of $169.6 billion, or 57.4%.
Still, plan funding levels will have to rise significantly to move into the black, which hasn't happened since 2007, when the plans had an aggregate surplus of $82.3 billion, according to Towers Watson.