Strong investment returns and lower liabilities resulting from higher discount rates produced a significant improvement in the funding ratios of U.S. corporate defined benefit plans in 2013, according to a study from Milliman.
The funding ratio of the 100 U.S. corporations measured by Milliman in its 2014 Pension Funding Study totaled 87.9% in 2013, up from 77.3% the previous year.
The primary contributor was a 71-basis-point increase in the median discount rate to 4.75% from 4.04% the previous year. As a result, the projected benefit obligation of Milliman 100 companies totaled $1.592 trillion as of Dec. 31, down 7.5% from $1.722 trillion the previous year.
While the median actual rate of return was less than the previous year, 9.9% vs. 11.7%, it contributed to an increase in total assets to $1.399 trillion from $1.33 trillion.
The plans also made fewer contributions to their plans in 2013, most likely due in part to provisions in the MAP-21 legislation signed into law in July 2012 that provided corporate pension funding relief. The plans made a total of $44.1 billion in contributions in 2013, down from $62.2 billion the previous year.
John Ehrhardt, principal and consulting actuary at Milliman, said the drop in contributions was the biggest surprise, because executives at Milliman told clients to “take the middle ground” in adjusting their contributions.
“Now that we see the significant improvement in funded status, I don't expect contributions to go up again,” said Mr. Ehrhardt. “I think we're down to this new lower level.”
More plans reported surpluses in 2013 than the previous year as well. Of the 89 companies with fiscal years that ended Dec. 31, 18 plans reported a funding ratio greater than 100%, compared to only six companies at the end of 2012.
Overall, 99 of the 100 companies reported an improved funding ratio over the previous year, compared with 41 companies with improved ratios in 2012 over 2011. The only company with a decline in funding ratio has a fiscal year-end of Feb. 2 and its 10-K filing does not reflect the investment performance of calendar year 2013.
The study is based on 10-K filings by the 100 largest publicly traded U.S. corporations with defined benefit pension plans.
