The funding ratio of pension plans sponsored by S&P 500 companies fell 6.7 percentage points to 81.2% in 2014, said new research from S&P Dow Jones Indices.
In 2014, S&P 500 pension plan underfunding increased $164.5 billion to $389 billion, primarily because of new mortality assumptions and accounting procedures, and a 104-basis-point increase in the discount rate to 3.92%, which raised pension fund liabilities 12% to $2.07 trillion.
During the same period, assets grew 3.6% to $1.68 trillion, boosted by double-digit equity market returns; the S&P 500 returned 13.7% in 2014.
Also in 2014, pension funds' assumed rates of return declined 10 basis points to 7%, making it the 14th consecutive year that assumed rates of return have declined, said Howard Silverblatt, senior index analyst and co-author of the report in a telephone interview.
Corporate plan sponsors are moving to fixed income and avoiding the risk of equities, Mr. Silverblatt said on why assumed rates of return have declined.
The report also found companies contributed $53.9 billion to their pension funds in 2014, up slightly from $53.6 billion in 2013. Companies expect to contribute $32.6 billion to their pension funds in 2015.
The report also indicated underfunded levels for other post-employment benefit funds increased 7.9% to $195.6 billion in 2014. The funding ratio of those trusts declined to 26.7% from 28.5%.
Together, the assets that S&P 500 companies set aside to fund pension benefits and OPEB totaled $1.75 trillion, covering $2.34 trillion in liabilities and resulting in an underfunding of about $590 billion.
Despite these numbers, pension and OPEB funds, in aggregate, are a manageable expense for S&P 500 companies, Mr. Silverblatt said.
“On the longer-term picture, there is light at the end of the corporate retirement benefit obligation tunnel, as enrollment in defined pensions and OPEB programs are limited, with benefits being lower and risk shifted. The result is the corporate obligation, and employee benefit, will slowly sail into the sunset,” Mr. Silverblatt said.
Data were collected from S&P 500 companies with defined benefit plans, the majority of which had Dec. 31 fiscal year-end dates.