Asset AllocationJanuary 12, 2014

Corporate Pensions’ Funded Status Continues to Soar

<p>The average funded ratio of US corporate pension plans hit its highest since September 2008 thanks to vibrant equity markets and an increase in interest rates.</p>

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(January 12, 2014) — The typical US corporate pension plan’s funded status reached 95.2% as of December 2013, according to BNY Mellon’s Investment Strategy & Solutions Group (ISSG).

Assets rose 0.8% and liabilities dropped 0.6% during the month. ISSG said the decrease in liabilities could be attributed to an increase in the Aa corporate discount rate to 4.93%.

“December capped off a strong year as the funded status of the typical US corporate plan increased more than 18 percentage points in 2013,” said Jeffrey Saef, managing director of BNY Mellon and head of ISSG. “It was the best of all worlds as rising equities benefited the asset side, while the rising discount rate resulted in lower liabilities. These trends have encouraged a growing number of plan sponsors to reduce their exposure to market volatility.”

Milliman’s latest pension funding index found similar results: a 87 basis point rise in interest rates have resulted in a one-year net funding gain of $318 billion, according to the actuarial firm.

“This was the first win-win year for pensions since 2007, with assets improving by $128 billion and liabilities decreasing by $190 billion,” said John Ehrhardt, co-author of the Miliman Pension Funding Index. “Just to put this rally in perspective: These pensions saw a $337 billion decrease in funded status in 2008, and in the past year we saw a $318 billion improvement. These plans’ performance in 2013 nearly erased the losses of 2008. We are getting back on track.”

The report also said in December 2013, 100 of the largest US defined benefit pension plans saw a $10 billion increase in assets and another $10 billion decline in liabilities.

Milliman projected funded status to increase in 2014 and 2015 as long as companies met the 7.5% expected return and the current discount rate maintained. Specifically, the report said corporate pensions will reach a funded ratio of 100.9% by the end of 2014 and a ratio of 106.8% by the end of 2015.

Under an “optimistic forecast” of rising interest rates—projections of 5.43% by the end of 2014 and 6.03% by the end of 2015—funded ratio would soar to an estimated 113% by the end of 2014 and 134% by the end of 2015, the report said.

If interest rates were to decline to 4.23% by 2014 and 3.63% by 2015, Milliman projected a complementary decrease in funded ratio to 89% by 2014 and 84% by 2015.