U.S. corporate pension plans could reach full funding in 2018 as a result of the Federal Reserve raising interest rates, said a report from Moody's Investors Service released Monday.
The aggregate funded status is estimated to remain at 78% at the end of 2015, unchanged from 2014 and only 200 basis points above the 2008 level of 76%. However, funding levels are expected to improve after interest rates rise, the report said.
If discount rates rise to either 5.7% or 6% by 2019, as anticipated, and the pension funds achieve their 7.75% annual assumed rate of return, the pension plans could achieve full funding in 2018, Moody's estimates.
If the pension funds achieve a 2% investment return for 2015, assets could reach $1.64 trillion at the end of year, down 1.8% from 2013 but up 54.72% from 2008, Moody's estimates in its report.
Liabilities are estimated to total about $2.09 trillion as of Dec. 31, down 1.88% from 2014, but up 50.4% from 2008, if the discount rate reaches 4.3%, at year-end. The average discount rate at the end of 2014 and 2008 was 4% and 6.5%, respectively.
The report also looked at plans' funding ratios if the discount rate increase is larger than expected, reaching 7.5% by 2019. Under that scenario, plans could achieve full funding in just 18 months, rising to more than 120% funded by the end of 2019. However, this wouldn't necessarily be a good thing, said Wesley Smyth, vice president, senior accounting analyst, at Moody's, and co-author of the report, in a telephone interview. If rates overshoot expectations and plans achieve 120% funding by the end of 2019, plan executives are going to be faced with trapped capital as they are prohibited from withdrawing funds until pension benefit obligations have been extinguished, Mr. Smyth said.
The defined benefit plans of roughly 670 rated U.S. non-financial companies were assessed.