Pension Funding Up Sharply in 2013

January 2, 2014 ( – The pension funded status of the U.S.’s largest corporations jumped by 16 percentage points in 2013, year-end analysis shows.

Researchers at Towers Watson ascribe the growth mainly to higher stock market returns and rising interest rates. In developing the analysis, researchers examined pension plan data for the 418 Fortune 1000 companies that sponsor qualified defined benefit (DB) pension plans and have a fiscal year ending in December.

Results indicate that the aggregate pension funded status for the companies is about 93%, a substantial jump from 77% at the end of 2012 but still well below the 106% pre-recession funded status observed in 2007.

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“The strong stock market and higher interest rates last year gave plan sponsors the one-two punch they needed to cut the funding deficit of their corporate pension plans by nearly 75%,” explains Alan Glickstein, a senior retirement consultant for Towers Watson. He also points out that, despite strong gains last year, the funded status of the largest U.S. corporate pensions still hovers well below 100%—a level reached only three times since 2000.

In dollar terms, pension plan funding improved by $285 billion last year, leaving a deficit of $99 billion at the end of 2013. Other figures show total pension plan assets increased by an estimated 9% during the year, to $1.409 trillion.

Dave Suchsland, a senior retirement consultant at Towers Watson, tells PLANSPONSOR that the Moving Ahead for Progress in the 21st Century Act (MAP-21) gave plan sponsors significant relief last year on contributions made to pension funds on behalf of plan participants.

MAP-21, in part, changed funding rules for corporate pensions to allow the use of higher interest rates in determining cash contribution requirements. The law was a primary driver in bringing contribution requirements down, Suchsland explains.

Towers Watson estimates that companies contributed $48.8 billion to their pension plans in 2013—a 23% decrease from 2012.

Lower contributions are good news for both sponsors and participants, Suchsland adds, as companies should see better balance sheet results and improved plan security for 2014.

Suchsland also predicts that 2014 will see “a lot of action on de-risking,” due in large part to the substantial improvement in funded status.

“I think there will continue to be a surge in interest for settling pension liabilities,” Suchsland says. “You’re going to have a lot more organizations seriously considering the annuity market and settling some of these liabilities with the insurance companies.”

Another factor sponsors may consider while examining pension liability annuitization in 2014 is increasing Pension Benefit Guaranty Corporation (PBGC) premiums. Effective October 15, the per-participant flat premium rate for plan years beginning in 2014 is $49 for single-employer plans, up from a 2013 rate of $42.

PBGC premium payments are used to fund the agency’s operations and pension benefit insurance programs.

“The premium increases are more significant when looking at the long-term future,” Suchsland explains. “In any year, the change is not going to be gigantic, but if you add the increase up for the plan’s lifetime, those are big numbers. I suspect the PBGC premium increases are going to cause more companies to start thinking about these settlement options.”

The idea is that, by paying a lump sum to annuitize pension liabilities, a plan sponsor can avoid paying the PBGC premiums year after year. This becomes more important as a pension plan’s funded status improves—leading to a decrease in the gap between the plan’s liabilities and the cost of annuitization.

In looking ahead, Suchsland says it’s still difficult to predict what the markets will be doing a full year from now and what impact they may have on large corporate pensions.  

“There is still room for interest rate rises over time,” Suchsland says. “We have to wait and see what happens with the equity markets as well. They were up quite a bit in 2013, and that had a big impact on these results. If there’s giveback there, it will obviously hurt plan sponsors.”

More on Towers Watson’s year-end analysis is available here.