Funding levels take a tumble in 2014

The funded status of corporate defined benefit plans in the U.S., U.K. and Canada dropped in the 12 months ended Dec. 31 as liabilities rose faster than assets, various funding reports showed.

• In the U.S., year-end reports showed the funding levels dropping anywhere from close to five percentage points to nine percentage points.


• Funding ratios in the U.K. dropped nearly six percentage points.


• In Canada, DB plans experienced their first funding decline since 2011, dropping nearly 2.7 percentage points.

The funded status of the 100 largest U.S. corporate defined benefit plans dropped to 83.6% at the end of December, down 470 basis points year-over-year, according to the Milliman 100 Pension Funding index.

The discount rate ended the year at 3.8%, the lowest level on record since Milliman Inc.'s study began 14 years ago and eliminated the funding gains experienced in 2013, said Zorast Wadia, New York-based principal, consulting actuary and co-author of the Milliman report, in a telephone interview.

“All of the gains that were achieved in 2013 were given back,” Mr. Wadia said. “We're looking more like year-end 2012” when the funded status was 77.2%.

Investments returned 9.5% in the 12 months ended Dec. 31.

According to BNY Mellon, the typical U.S. corporate pension plan ended the year 87.3% funded, down 7.9 percentage points from the Dec. 31, 2013, high of 95.2%.

A 93-basis-point-drop in the discount rate caused liabilities to swell 18.48% in 2014, while assets rose 8.79%, according to BNY Mellon.

“For (plan) sponsors, it's a painful reminder that you must take into account liabilities when you're developing your investment strategies,” said Andrew D. Wozniak, head of fiduciary solutions of the investment strategy and solutions group within BNY Mellon Investment Management, Pittsburgh, in a telephone interview.

In another report, Mercer said the funded status of S&P 1500 companies with defined benefit plans fell to 79% as of Dec. 31, down nine percentage points from year-end 2013.

Estimated aggregate assets totaled $1.89 trillion at the end of 2014, up 5% year-over-year, while estimated projected benefit obligations were $2.39 trillion, up 17.7% from a year earlier.

The discount rate dropped 88 basis points to 3.81%, while the S&P 500 rose 11.4% in 2014, Mercer reported.

According to Towers Watson & Co., the funded status of the largest U.S. corporate pension plans fell nine percentage points in 2014 to 80% from 89% at year-end 2013.

The firm estimated the overall pension funding deficit rose $181 billion, to $343 billion, during the year, while assets increased 3% to $1.4 trillion. Investments returned 9% during the period.

About 40% of the increase in the funding deficit can be attributed to strengthening mortality assumptions published by the Society of Actuaries in 2014, said Dave Suchsland, senior retirement consultant at Towers Watson in Philadelphia, in a telephone interview.

The improved mortality assumptions combined with a 90-basis-point drop in the discount rate nearly “wiped out” 2013's gains, bringing the funded status closer to 2012 levels, when it was 77%, Mr. Suchsland added.

“At this time last year, everybody was celebrating the big jump in funded status. We've wiped out 2013 at this point.” Mr. Suchsland said. “An already challenged pension system has now taken a significant step backward.”

Towers Watson also found that employer contributions fell to $30 billion in 2014, down 29% from 2013 and the lowest level since 2008. Mr. Suchsland attributed the decline to the improved funding position at the start of the year and legislation that reduced required contributions.

“(Some) companies that started the year at a better funding position weren't thinking they had to put as much money in,” he said.

Towers Watson analyzed data from 411 Fortune 1000 companies with a fiscal year ended Dec. 31.

U.S. pension funds were not the only ones experiencing funding ratio declines.

The aggregate deficit of the defined benefit plans of the U.K.'s largest 350 firms almost doubled in the year ended Dec. 31 to £107 billion ($162.2 billion), a Mercer report said.

The consultant's Pensions Risk Survey showed that, on an accounting basis, the combined deficit of FTSE 350 companies increased 91.1% compared with year-earlier figures.

Funding ratios decreased to 85% at year-end 2014, compared with 90.9% as of Dec. 31, 2013.

Asset values increased 8.4% to £608 billion, while liabilities increased 15.9% to £715 billion during the year.

Mercer said in a statement that historic lows in corporate and government bond yields in the second half of 2014 led to a sharp increase in deficits.

“A huge variety of global financial and economic factors affected yields in 2014, and we anticipate continued volatility in 2015,” said Ali Tayyebi, Birmingham, England-based senior partner in Mercer's retirement business, in the statement. “Whilst the recent fall in yields may cause many pension schemes to review the hedging of their interest rates, schemes should be open to the opportunities that volatility provides. Companies and trustees should be prepared.”

Separately, public and private Canadian DB plans experienced their first funding decline since 2011.

The funding ratio of Canadian DB plans administered by Aon Hewitt was a median 90.6% as of Dec. 31, down 2.7 percentage points below the median at the end of 2013, said a news release about the survey.

The funding ratio of the surveyed plans reached a peak of 96.6% in April 2014 but plunged to 91.1% at the end of the third quarter.

About 18.5% of the 449 surveyed plans were more than fully funded as of Dec. 31, compared with 26% at the end of 2013.

Lower prevailing rates on the longer end of the yield curve helped long-term bonds return 16.7% in 2014, but also caused discount rates used to value plan liabilities to fall. Equity performance partially offset the decline, led by U.S. equities with a 26.3% return, followed by global equities at 16.3% and Canadian equities at 10.8%. Global real estate returned 28.2% for the year, while infrastructure returned 26.9%.

The returns include the 8.5% gain from the depreciation in the Canadian dollar in 2014.

Sophie Baker and Rick Baert contributed to this story.