According to “S&P 500 Corporate Pensions and Other Post-Employment Benefits (OPEB): The Final Frontier,” DB plan deficits were cut in half, from $224 billion in 2013 from $452 billion in 2012, and plans’ funded status increased from 77.3% to 87.8%. During the same period, the funding status of OPEB grew from 22.3% to 28.5%.
When it comes to DB plans, the authors of the paper find that in 2012, these plans had more $1.53 trillion dollars in funding, compared with $1.32 trillion in 2011. That increase was due to strong equity markets and boosted by larger-than-expected contributions. In terms of asset allocations in 2012, plans shifted away from equities and over more to fixed income in an effort to reduce risk. In 2013, investment allocations remained much the same, as risk concerns continued.
Companies contributed $53.6 billion to their pensions in 2013, when they had been expected to contribute only $42.9 billion. For 2012, $74.5 billion was contributed by employers, when only $46 billion was anticipated.
The paper notes that OPEB suffer from a lack of uniform information and a lack of funding requirements. OPEB usually include health care, but may also include life insurance, disability, legal and other services. As medical and drug costs continue to outpace inflation and life expectancies remain higher than ever before, the estimated growth rate used in determining the present value of OPEB becomes a major focus, say the paper’s authors.
They also note that pensions have the backing of the Pension Benefit Guaranty Corporation (PBGC), while OPEB have no such support.
According to the report, 287 companies within the S&P 500 reported having OPEB accounts in 2013, which is down slightly 292 companies in 2012 and 2011.The paper notes that some of these plans are closed or restricted to new employees. For 2013, the aggregate underfunding of OPEB obligations was $181.2 billion, a decrease of 22.9% from the $234.9 billion underfunding of 2012.
Companies have continued to cut back on OPEB and cap payments, and they have introduced multi-tier benefit programs for new employees, according to the report. In addition, companies are introducing alternative plans, which may directly or indirectly continue to shift more of the financial burden and responsibility to current and future retirees.
“Pensions and OPEB have become a social issue, with the key questions being related to coverage, expense and how to pay for it,” conclude the report authors. “While short-term solutions are being discussed, the ability to implement and pay for them will be the true test.”
A copy of the report can be found here.