According to the “2014 Wilshire Consulting Report on Corporate Pension Funding Levels,”defined benefit (DB) pension plans sponsored by companies included in the Standard & Poor’s (S&P) 500 Index staged a remarkable improvement during 2013, with the aggregate funded ratio (assets divided by liabilities) increasing from 77.6% to 89.8% and the $371.2 billion funding shortfall shrinking to $153.9 billion by the start of this year.
This is the 14th corporate funding report issued by Wilshire Consulting, the institutional investment advisory and outsourced chief investment officer (OCIO) business unit of Wilshire Associates Inc.
In other positive news, the percentage of corporate pension plans that were underfunded as of fiscal year-end 2013 fell to 80%, a substantial drop compared with fiscal year-end 2012, when 94% of the plans were underfunded, explains Russ Walker, vice president at Wilshire Associates and an author of the report. The median corporate funding ratio for fiscal 2013 was 89.3%—markedly better than the median funding ratio of 77.6% for the previous fiscal year.
Walker also notes that 61 of the 306 corporations in the study, or 19.9%, have pension assets that equal or exceed liabilities. In comparison, 18 of the 306 corporations’ defined benefit plans, or 5.9%, were fully funded or running a surplus at year-end 2012.
The total assets of the defined benefit plans analyzed for the study increased by $71.8 billion, or 5.6%, from $1.288 trillion to $1.359 trillion. At the same time, liabilities decreased $146 billion, or 8.8%, from $1.659 trillion to $1.513 trillion. Walker says interest rates used to discount current commitments to future benefits rose during 2013, contributing to the overall decrease in pension liabilities for the year. The median discount rate increased from 4.00% to 4.80%.
The defined benefit plans in Wilshire Consulting’s study yielded a median 11.1% rate of return for fiscal 2013. This strong performance combines with the 11.8% median plan return for 2012, the 3.6% median plan return for 2011, the 11.9% median plan return for 2010 and the 16.0% median plan return for 2009.
The combined pension expense for the S&P 500 Index companies in the study was $35.5 billion for 2013, down from $64.2 billion a year ago. Regular annual pension expense accruals from employee service and interest expense on existing liabilities totaled $96.2 billion in 2013, 2.3% lower than the $98.5 billion observed a year ago.
The S&P 500 Index companies in Wilshire’s study contributed $40.8 billion into their defined benefit plans in 2013, a decrease from the $61.1 billion contributed in 2012. Aggregate benefit payments from the S&P 500 corporate pension plans also increased 3.1% year over year. These plans’ benefit payments totaled $88.8 billion in 2013, compared with $86.2 billion during the previous year.
The distribution of pension liabilities and assets of S&P 500 Index companies is strongly concentrated among the largest plans, Walker explains. As of the end of fiscal year 2013, more than half of the total pension assets and liabilities were held by the 25 largest plans when ranked by both asset and liability size. Conversely, the smallest 100 plans when ranked by asset and liability size, made up just 2.6% and 2.7% of the total asset and liability pools, respectively.
According to Walker, to prepare the report, Wilshire collects data on U.S. pensions from 10-K filings for companies in the S&P 500 Index at year-end. All data for fiscal years 2013 and 2012 are based on S&P 500 Index constituents as of year-end 2013 and, therefore, may differ slightly from the list of companies represented in earlier years.