If you have a pension or expect to receive one in retirement, congratulations—you’re one of a dwindling number of Americans with access to these coveted retirement benefits. (See this from the Employee Benefit Research Institute.) Now, a new analysis by consulting firm Towers Watson contains more good news for you: The financial health of defined benefit pension plans—which took a beating during the recession—is on the mend, which makes it more likely that your employer will deliver the promised benefits.
- The ‘pension deficit’ is at its lowest since 2007.
According to Towers Watson’s analysis of year-end corporate disclosures, the 100 largest pension plans saw their liabilities shrink 57%, from $295.5 billion at year-end 2012 to $125.9 billion in 2013. Overall, the “pension deficit” “hasn’t been this small since 2007,” according to Towers Watson.
On average, corporate pension plans held 91 cents on Dec. 31 for every $1 they owed in benefits, up from 78 cents in 2012. That represents “the best funding level since the end of 2007,” when the average was $1.03 in assets for every $1 of promised benefits. In another positive development, the number of companies with fully funded plans jumped from five at the end of 2012 to 22 at the end of 2013.
Behind the improving picture is 2013’s stock market rally; average investment returns among the 100 largest pension plans rose by 10.8% last year. Also helping are rising interest rates, which reduce the value of the liabilities corporations owe under these plans.
Growing pension fund balances are good for more than just employees. For companies, stronger pension balance sheets reduce the need for cash contributions to these funds. They may also inflate corporate earnings. (See this Bloomberg Businessweek story.)
On average, plan sponsors contributed $27.8 billion to their pension plans in 2013, down from $45.2 billion in 2012. This was the smallest contribution since 2008. “After many years of making large contributions, some sponsors took contribution holidays or decided to contribute significantly less in 2013,” Towers Watson said.
Since 2009, corporate pension managers have reduced their overall investment allocations to equities by 12%. At the same time, they raised their allocations to fixed income by nine percentage points.