By Cyril Tuohy
A new analysis by the consulting firm Towers Watson has found that big stock market gains and rising interest rates powered Fortune 1,000 aggregate pension plan funding levels to their best levels since 2007.
Aggregate pension plan funding rose 16 percentage points to 93 percent of all Fortune 1,000 plans as funding improved by $285 billion last year, according to estimates of 418 companies with December fiscal year end dates.
“The strong stock market and rising 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 percent,” said Alan Glickstein, a senior retirement consultant at Towers Watson.
Last year, the Standard & Poor’s 500 index rose 29.6 percent, and U.S. Treasury 10-year yields jumped 1.27 percentage points.
Improving markets meant companies contributed $48.8 billion in their pension plans in 2013, which was 30 percent less than in 2012, Towers Watson also said. With 93 out of every 100 plans funded, some plans are still short. In the aggregate, the Fortune 1,000 plans were short $99 billion last year.
Total pension plan assets in the nation’s largest corporate plan sponsors crested the $1.4 trillion mark last year, an increase of 5 percent from $1.2 trillion in 2012, Towers Watson also said. The last time funding levels were this high was in 2007, when plans were 106 percent funded, or when plans had the equivalent of $106 in assets for every $100 in liabilities.
Dave Suchsland, a senior retirement consultant at Towers Watson, said that the return of robust funding levels would spur companies to continue moving their pension liabilities off the balance sheet in light of premium increases by the Pension Benefit Guaranty Corporation, new mortality tables and higher life expectancies.
“The improved funding environment will provide pension plan sponsors with some intriguing opportunities in 2013,” Suchsland said in a news release.
Pension experts, citing other surveys, said they expect companies to remove pension funds from their balance sheets by offering lump sums to beneficiaries, transferring the risk to a life and annuity carrier, or by executing a combination of the two.
Mercer and CFO Magazine’s Pension Risk Survey, found that 28 percent of senior finance executives said they were “very likely” to consider lump-sum distributions for former employees who have not yet retired, and 39 percent of executives said they were “somewhat likely” or willing to consider such an option.
The survey also found that 15 percent of executives said they were “very likely” to transfer pension liabilities and 33 percent were “somewhat likely” or willing to consider it.
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at email@example.com.
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