Year ends on a high note for pension funding

December saw continued improvement in the funded status of U.S. corporate defined benefit plans, according to monthly reports from BNY Mellon Investment Management's investment strategy and solutions group and Milliman.

In the U.K., the broad news also was good, as the aggregate deficit of occupational pension funds in the Pension Protection Fund's 7800 index more than halved in December to £27.6 billion ($45.3 billion).

In the U.S., the funding ratio of the typical corporate pension plan was 95.2% at the end of the year, the highest since September 2008, according to the BNY Mellon Institutional Scorecard.

Assets rose 0.8% from the previous month, while liabilities fell 0.6% as the corporate discount rate rose eight basis points to 4.93%. The discount rate for the end of the December also was 104 basis points higher than the previous year.

The funding ratio of a typical plan was 18.9 percentage points above its ratio of 76.3% at the end of 2012.

Reports earlier this year from Mercer, Towers Watson and Aon Hewitt recorded similar results for S&P 1500 U.S. company pension plans and Canadian DB plans.

Jeffrey Saef, Boston-based managing director and head of the investment strategy and solutions group at BNY Mellon, said while the substantial improvement this year has been exciting, the real headline is what lies ahead following this strong year.

In 2014, “I don't know what month it's going to be, but these numbers are going to be over 100% and that's new news and interesting news,” said Mr. Saef in a telephone interview. “All of the baseline factors you need to see are in place.”

Mr. Saef said the likelihood of full funding is there due to a reasonable growth in assets working in tandem with rising interest rates given the Federal Reserve Bank's tapering conversation.

The Milliman 100 Pension Funding Index's funding ratio of 100 of the largest U.S. corporate pension funds at the end of December was 95.2%, an increase of 1.3 percentage points from the previous month, also the highest ratio since September 2008.

For December, assets increased $10 billion to $1.45 trillion, while liabilities decreased $10 billion to $1.523 trillion.

For the year overall, funding among the 100 plans improved by $318 billion, while the funding ratio increased by 18 percentage points from 77.2% at the end of 2012.

“This was the first win-win year for pensions since 2007, with assets improving by $128 billion and liabilities decreasing by $190 billion,” said John Ehrhardt, principal, consulting actuary and co-author of the report, in a news release. “Just to put this rally in perspective: These pensions saw a $337 billion decrease in funded status in 2008, and in the past year, we saw a $318 billion improvement. These plans' performance in 2013 nearly erased the losses of 2008. We are getting back on track.”

In London, the £27.6 billion estimated aggregate deficit of the funds in the PPF 7800 at the end of December represents the smallest deficit since June 2011, when there was a surplus, according to a news release on the PPF figures by Towers Watson & Co.

The PPF 7800 covers 6,150 funds. The £27.6 billion deficit at the end of December compares with £59.7 billion at the end of November. The PPF said in its latest update that 3,701 funds were in deficit, with the remaining 2,449 funds in surplus.

Aggregate deficits also are down compared with December 2012, when they were at £221.2 billion. The funding level improved over the year to a funding ratio of 95% from 82.8%.

Fund assets within the index totaled £1.133 trillion at the end of 2013, increasing 6.4% from 2012. Aggregate liabilities decreased 2.7% in December, to £1.160 trillion, and were down 9.8% for the year.

But not all funds shared in the good news. A separate survey by Mercer of a much smaller universe — companies in the FTSE 350 — found the deficit for those funds increased 35% as of Dec. 31, compared with the end of 2012, to £97 billion, despite strong stock market returns. The deficit equates to a funding ratio of 85%, down from 88% a year earlier.

Still, December's deficit was an improvement from November, when the aggregate deficit was £102 billion, according to data from Mercer's Pensions Risk Survey.

“Over 2013 as a whole it has been interesting to see how the three key elements which drive the deficit calculation have independently influenced the deficit,” said Ali Tayyebi, head of DB risk in the U.K. at Mercer.

Mr. Tayyebi said an increase in corporate bond yields in the middle of 2013 reduced the value ofpension fund liabilities, although a subsequent decrease pushed deficits up “by £20 billion over the second half of the year despite the U.K. stock market returning 10% over that period.”

Mercer said funding and solvency deficits, however, have improved, leading to an increase in buyout transactions and other liability deals.

“Looking forward into 2014, there are likely to be further transactions,” said Adrian Hartshorn, senior partner in Mercer's financial strategy group. “These will likely involve a further transfer of risk to the insurance market through more buyout and longevity transactions. However, there are also likely to be other transactions and exercises implemented by scheme sponsors, such as options that allow pensioners and deferred pensioners additional flexibility in the way they draw their benefits.”