Corporate pension funding ends 2013 on great note — Mercer, Towers Watson

The funded status of corporate defined benefit pension plans ended 2013 with the best single-year improvement in 15 years, according to reports from Mercer and Towers Watson.

The funded status of S&P 1500 company pension plans, as studied by Mercer, improved two percentage points to 95% in December and is up 21 percentage points for the year. Towers Watson estimates 418 Fortune 1000 companies with a fiscal year ended Dec. 31 saw their pension funds improve 16 percentage points to 93%.

Strong investment returns coupled with a surge in the discount rate resulted in easily the best one-year improvement over the last 15 years. It is also the highest year-end number since the plans were 106% funded at the end of 2007, according to Towers Watson.

“It really is (the result of) both pieces moving in the right direction,” said Dave Suchsland, senior retirement consultant at Towers Watson. “Equity exposure impacted the results even more than the rate increase.”

The S&P 500 was up more than 30% for the year.

Mercer reports the discount rate increased 98 basis points during the year to 4.69%, while Towers Watson estimates it increased by an average of 84 basis points.

For the year, Mercer said the overall pension deficit was cut by more than 80% to $103 billion from $557 billion. Assets increased 16% to $1.85 trillion for the year. Towers Watson reports the deficit improved by $285 billion to $99 billion total at the end of 2013, while assets increased 9% to $1.409 trillion.

“The improved funded status will have plan sponsors deciding whether to do something now to derisk the plan … such as lump sums or annuitizations,” Mr. Suchsland said.

The funded status improvement was despite a decrease in aggregate contributions. Towers Watson estimates contributions decreased 23% to $48.8 billion. Mr. Suchsland said it was likely the combination of prior legislation driving down the required contributions and companies becoming less likely to make discretionary contributions with returns and rates improving the health of pension plans.