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Financial health of largest US corporate pension plans improved sharply in 2013

The financial health of corporate America’s largest pension plans improved significantly in 2013 as funding improved to a level not seen since the start of the financial crisis, according to an analysis by Towers Watson.

The analysis cited rising interest rates, which lowered liabilities, and moderate investment returns as the primary reasons for the overall improvement.
 
The analysis of year-end corporate disclosures found that the pension deficit for the 100 largest pension sponsors among US publicly traded organisations fell 57 per cent, from USD295.5bn at year-end 2012 to USD125.9bn at year-end 2013, a decrease of USD169.6bn.
 
The pension deficit for these companies has not been this small since 2007, when plans had a surplus of USD82.3bn.
 
Meantime, the overall average funded status jumped 13 percentage points, from 78 per cent at the end of 2012 to 91 per cent at the end of 2013. That is the best funding level since the end of 2007, when the average stood at 103 per cent.
 
Additionally, the number of plan sponsors with fully funded plans surged from five at the end of 2012 to 22 at the end of 2013. At the end of 2007, half of these 100 plans were fully funded.
 
“Plan sponsors made great strides to shore up the financial condition of their pension plans last year,” says Dave Suchsland, senior consultant at Towers Watson. “The rising stock market, combined with higher interest rates for the first time in five years, pushed funding levels significantly higher. This is good news for employers, as stronger pension fund balance sheets will reduce required cash contributions in the near term while lower pension costs will improve corporate earnings.”
 
According to the analysis, companies continued to contribute relatively large amounts to their plans during 2013, with sponsors’ median contribution being 60 per cent more than the value of benefits accruing during the year. However, the contribution levels were much lower than in prior years. For 2013, plan sponsors contributed USD27.8bn, down from USD45.2bn in 2012. That is the smallest contribution since 2008, when companies added USD16.8bn to their plans. After many years of making large contributions, some sponsors took contribution holidays or decided to contribute significantly less in 2013. Six of the 10 largest cash contributors in 2012 pumped USD11.3bn into their plans, compared with USD0.8bn in 2013.
 
“It will be interesting to see how the improved funding levels, if sustained, and overall financial health of pension plans will affect plan sponsors’ pension de-risking efforts in 2014,” says Alan Glickstein, senior retirement consultant at Towers Watson. “The improved funded position, combined with recent increases in Pension Benefit Guaranty Corporation premiums and a newly released Society of Actuaries mortality study, will make de-risking actions very attractive in 2014.”

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