The funding ratio of U.S. corporate defined benefit plans improved significantly in 2013 as a result of a strong global equity market and higher discount rates, according to an annual report from Wilshire Consulting.
Using 10-K filings by companies in the S&P 500 index that have defined benefit pension plans, the latest study reveals the aggregate funding ratio of those plans jumped to 89.8% at the end of 2013.
It is a dramatic 12.2 percentage point increase from the 77.6% aggregate funding ratio reported as of Dec. 31, 2012.
Meanwhile, the median discount rate increased to 4.8% in 2013 from 4% the previous year.
The improvement in funding ratio is a strong reminder for corporate defined benefit pension funds to stay the course on their long-term strategies, according to Russell J. Walker, vice president, Wilshire Associates, and co-author of the report.
“I don't know that it changes their long-term perspective,” Mr. Walker said in a telephone interview. “What I think the past years have told us all is that markets can change and plans need to exercise discipline both in their asset investment and fiscal policy to make sure that these plans stay on an even keel.”
The S&P 500 index companies saw their funding ratios improve despite reducing their overall contributions to $40.8 billion in 2013, down from $61.1 billion in 2012.
“Another factor that helped them was MAP-21 in that it offered a certain amount of funding level relief and that helped the plan sponsors certainly in their annual contributions to the plans,” Mr. Walker said.
MAP-21, or the Moving Ahead for Progress in the 21st Century Act, was passed into law in July 2012 and offered pension funding relief.
“I think plan sponsors are looking at their policies and determining what is working, and they're going to maintain them,” Mr. Walker said. “Those discussions are going to help them through good markets, bad markets, rising interest rates (and) falling interest rates.”
Wilshire Consulting is the institutional consulting and outsourced CIO business unit of Wilshire Associates.