Corporate pension plan funding levels saw major growth in 2013

Rising interest rates and a strong stock market contributed to a strong year for defined benefit plans, according to recent research from Towers Watson, with pension plan funding levels rising  by 16% last year, the highest level since 2007.

At the end of 2013, aggregate pension funded status was projected to hit 93%, a large gain over 2012’s 77%. However, this is still below 106% in 2007. Since 2012, overall pension plan funding grew by $285 billion, with a $99 billion deficit.

In a separate study by Mercer, the pension funded ratio improved to 95% in 2013, a 21% increase. Significant growth was also seen in equity markets as the S&P 500 index jumped by about 30%, and yields on high-grade corporate bond rates moved upward, which reduced pension liabilities. Meanwhile, the discount rate for mature pension plans grew from 3.71% to 4.69%, an increase of nearly a full percentage point.

“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%,” says Alan Glickstein, senior retirement consultant at Towers Watson. “As a result of the funded status improvement, funding ratios are now at their highest levels since the financial crisis of 2008 but still well below 100%, a level reached only three times since 2000. The improved funding environment, together with legislative funding stabilization enacted in 2012, gave plan sponsors some relief from record levels of contributions since the 2008 recession.”

The Towers Watson research also finds that companies put away some $48.8 billion toward their pension plans in 2013, a strong improvement after post-market crash numbers but still a 23% drop from 2012. Projections find that pension plan assets grew from $1.288 billion at the end of 2012 to $1.409 billion at the end of 2013, a 9% increase.

“The improved funding environment will provide pension plan sponsors with some intriguing opportunities for 2014,” says Dave Suchsland, senior retirement consultant at Towers Watson. “We expect the actions we’ve seen among companies to de-risk their pension plans over the past several years will accelerate as funding levels continue to improve, especially in light of increases in PBGC premiums and mortality tables and projection scales with increased life expectancy.”