2013 A Great Year for Pension Funding Improvement

This improvement resulted in a funded ratio (that is, assets divided by liabilities) of 95% at the end of the month, up 21% for the year, according to research by consulting firm Mercer. The research also shows more than 80% of pension underfunding has been eliminated since the beginning of the year. And the collective deficit of $103 billion as of December 31, 2013, is down $454 billion from the estimated deficit of $557 billion as of December 31, 2012.

According to Mercer, equity markets enjoyed tremendous growth during 2013, with the S&P 500 Index increasing approximately 30%. Yields on high grade corporate bond rates also rose, leading to a reduction in pension liabilities. The Mercer Yield Curve discount rate for mature pension plans rose almost a full percent during 2013, from 3.71% to 4.69%. For a typical pension plan with a duration of 12 years, says Mercer, this means liabilities will be about 12% lower than they otherwise would have been using last year’s discount rate.

“December was yet another present under the tree for pension plan sponsors, who were already having a great year with regards to funded status improvement,” says Jonathan Barry, a partner with Mercer’s Retirement consulting group, based in New York. “We saw pretty steady improvement month by month, which has been driven by the combination of strong equity returns and rising interest rates. The 21% improvement is the best annual increase we have seen since we have been tracking this information, and the 95% mark is our highest year end result since 2007. This improvement should provide significant tailwind for 2014 earnings as pension expense is likely to decline significantly from 2013 levels.”

According to Richard McEvoy , leader of Mercer’s Financial Strategy Group, “We’ve seen many pension sponsors take steps over the past year or two to prepare for the conditions we’re seeing today. They’re better prepared than in 2000 or 2008 to protect their gains, and we’re now seeing these preparation steps turn in to action.”

McEvoy adds that many Mercer clients used glide path strategies during 2013 to systematically de-risk their plans as funded status improves. “We saw well over 100 funding level triggers hit during 2013 alone. In addition, 2014 is looking to be a big year for risk transfer strategies such as annuity buyouts and voluntary cashouts to former employees, as improving conditions make these options much more feasible than before.”

Mercer estimates the aggregate funded status position of plans operated by S&P 1500 companies on a monthly basis. The estimated aggregate value of pension plan assets of the S&P 1500 companies as of December 31, 2012, was $1.59 trillion, compared with estimated aggregate liabilities of $2.14 trillion. Allowing for changes in financial markets through December 31, 2013, changes to the S&P 1500 constituents and newly released financial disclosures, at the end of December the estimated aggregate assets were $1.85 trillion, compared with the estimated aggregate liabilities of $1.96 trillion.