Originally posted March 20, 2014 by Michael Giardina on https://ebn.benefitnews.com
A new analysis of the 100 largest corporate pension plans finds that retirement coffers bounced back in 2013, reaching record funded-status levels and cutting away at pension deficits that have plagued them since 2008’s financial collapse.
In a new Towers Watson study, the year-end analysis finds that plan sponsors for the U.S. publicly traded companies reported significant gains through rising interest rates and beneficial investment returns.
With a nearly $170 billion drop in the group’s pension deficit, the Towers Watson report states that the overall funded status increased by 13 percentage points to 91%. That is the best funding level since the end of 2007, when the average stood at 103%. Additionally, the number of plan sponsors 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.
The average discount rate increased by 83 basis points to 4.85% in 2013, while investment returns averaged 10.8%.
According to the analysis, companies continued to contribute relatively large amounts to their plans during 2013, with 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. That’s the smallest contribution since 2008, when companies added $16.8 billion to their plans. After many years of making large contributions, some 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.
“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. “…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.”
Even with these benefits, Towers Watson expects that additional pension de-risking measures will be seen among corporate pension plan sponsors as they prepare themselves for the next downturn.
“The improved funded position, combined with recent increases in Pension Benefit Guaranty Corporation premiums and a newly released Society of Actuaries mortality study, will make de-risking actions very attractive in 2014,” says Alan Glickstein, senior retirement consultant at Towers Watson.
Previously, the PBGC premium increases, along with longer living retirees, were discussed by industry pension consultants. Mercer stated that plan sponsors need to consider investment policies and liability-driven investments, purchasing annuities for some or all plan participants and offering former employees lump-sum buyouts.
According to the PBGC, premium rates jumped up by $6 per participant in 2014 and $5 per $1,000 of unfunded vested benefits for single-employer plans. The single-employer rate increase was previously laid out in the Moving Ahead for Progress in the 21st Century Act, the PBGC says.
Mercer estimates that new mortality projections point to pension liability increases between 2% and 8% over the next few years. Gordon Fletcher, a partner in Mercer’s financial strategy group, stated earlier this month that new estimates point to individuals living to 87-years-old or slightly longer in some cases.