January 2, 2014 (PLANSPONSOR.com) – Funding levels of pension plans sponsored by S&P 1500 companies showed a 2% improvement in December 2013.
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.