A win-win year for pension plans

In 2013, the largest corporate pension plans in the United States experienced historic improvement, with plan liabilities decreasing by 7.5% and assets improving by an average of 9.9%.

Milliman’s 2014 Pension Funding Study says this resulted in a US$198.3-billion improvement in the funded status deficit from year-end 2012. While it was a “win-win” year for most sponsors, those with higher equity allocations performed the best.

“Last year was a great year for pension funded status and helped reduce much of the underfunding that has persisted since the global financial crisis,” says John Ehrhardt, consulting actuary and co-author of the study.

Plans that held off on de-risking were the biggest benefactors of the strong equity performance.

“With 18 of the 100 plans in our study now fully funded, and more hopefully reaching full funding this year, the timing for de-risking activities that can lock in funded status may be optimal,” he adds.

Study highlights include the following:

  • Interest rate increases evident in financial statements. The discount rates used to measure plan obligations increased from 4.04% to 4.75% in 2013. While these rates are still down from a high watermark of 7.63% in 1999, the improvement in 2013 went a long way toward minimizing the pension funded status deficit.
  • Investment performance exceeded expectations. The weighted average actual investment return on pension assets for the Milliman 100 companies’ 2013 fiscal years was 9.9%, which compares favourably with the expected return of 7.4%.
  • Contributions decline significantly during 2013. The US$44.1 billion in contributions during 2013 (down US$18.1 billion from US$62.2 billion in 2012) was the lowest level in five years.
  • Pension expense decreased. Favourable investment returns in 2012 offset the impact of declining discount rates in that year, leading to a reduced level of pension expense: a US$32.1-billion charge to earnings. This is US$23.7 billion lower than the record-high pension expense in 2012.
  • Market capitalization of these plans up more than 20%. The favourable equity market performance during 2013 increased the total market capitalization for the Milliman 100 companies by 21.2%.
  • Asset allocations remain relatively stable. The trend toward implementing liability-driven investing continued in 2013, but at a slower pace. Overall allocations to equities remained largely unchanged in 2013. With strong 2013 returns across most equity markets and losses in many fixed income sectors, it is evident that many plans rebalanced during the year by moving money from equities, and possibly other asset classes, to fixed income.
  • What to expect in 2014. Given the funded status gains in 2013, 2014 contributions are expected to decrease compared to those made in 2013. Plans already at surplus at the end of 2013 will have reduced incentive to further fund their plans in 2014.

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