The average funding ratio of the 22 largest pension plans sponsored by U.S. corporations rose to 96.5% as of Dec. 31, driven by discount rates rising to their highest level since the global financial crisis, according to a report from Russell Investments.
The hike in the average funding ratio from 95% at the end of 2023 was driven by an increase of 51 basis points in discount rates, according to the report, which utilizes 10-K filing data among Russell’s “$20 billion club,” the 22 companies have historically held more than $20 billion each in global pension liabilities and account for about 40% of all pension liabilities and assets among public U.S. corporations.
The average discount rate among members of the $20 billion club was 5.62% as of Dec. 31, up from 5.11% a year earlier. It was the highest average discount rate since the end of 2009, when the largest corporations reported an average of 6.05%.
That hike in discount rates led to a drop in total projected benefit obligations to $650.4 billion at year-end 2024, down from $708.5 billion at the end of 2023.
The discount rate increases came despite the Federal Reserve’s interest rate cuts in the second half of 2024, but corporate pension fund cash flows are projected much further into the future than the Fed’s short-term rates. As the Russell report said, the 10-year Treasury rate rose by about 70 basis points during the year.
Investment returns among the 22 corporate pension plans were muted because of their outsized allocations to fixed income given many of the plans’ emphasis on liability-driven investing. Despite a strong year for domestic equities, one in which the Russell 3000 index returned 23.8%, the $20 billion club posted average investment earnings of just above 2% for the year.
“I think most pension sponsors are going to see that their funded status was up during 2024 but maybe not by as much as they expected,” said Justin Owens, senior director and co-head of strategic asset allocation at Russell Investments and author of the report, in an interview. “There were a lot of headlines about extraordinary U.S. large-cap returns during 2024 — that index was up over 20% for the year — and when we looked at the largest plans funded status, it only improved by about 2% on average.”
“When we dug into it further, we found that the U.S. large-cap equity exposure is only around 10% for these plans because the focus has been entirely on risk management. They’ve decided, as their plans become better funded, to have larger allocations to fixed income,” Owens said.
That 2% investment return was not enough to offset benefit and other payments, and total assets in the universe dropped to $621.4 billion as of Dec. 31, down from $665.6 billion a year earlier.
The report is available on Russell's website.
