U.S. corporate pension plans are on average fully funded for the first time in 15 years, and plan executives are now in the unfamiliar position of being able to achieve the end state of their plans.
The publicly traded U.S. companies with the 100 largest defined benefit plans can now boast an average funding ratio of 100.2% as of Dec. 31, according to Pensions & Investments' analysis of the latest 10-K filings.
It is the first time the annual analysis has shown an average ratio of more than 100% in 15 years. The average ratio as of Dec. 31, 2007, was 108.6%.
The latest numbers represent an improvement over the average funding ratio of 96.9% calculated at the end of 2021.
That improvement came despite a dreadful investment return environment that saw the Russell 3000 index and Bloomberg U.S. Aggregate Bond index return -19.2% and -13%, respectively, for the year.
The result of that down year of investment returns was that the top 100 plans accumulated $245.7 billion in investment losses (with an average return of -19.1%) during 2022, which contributed to total assets falling 26% to $1.076 trillion as of Dec. 31 from $1.463 trillion a year before.
Despite that loss of assets, however, funding ratios improved due to an extraordinary environment of rising interest rates.
As of Dec. 31, the average discount rate among measured plans was 5.25%, a full 237 basis points above the prior year's average of 2.88%. That dramatic rise in discount rates came primarily as a result of the Federal Reserve's aggressive fight against inflation, which reached its end point in the calendar year on Dec. 14 when it raised the federal funds rate to a range of 4.25% to 4.5%.
The end result is that total liabilities among the 100 plans measured by P&I dropped 29% to $1.075 trillion as of Dec. 31 from $1.51 trillion a year earlier.
While not all plans achieved 100% funding the past year, 50 of the top 100 plans have achieved that status, and perhaps even more remarkably, 31 of the top 100 plans were funded above 110%.
"Now comes the time where we tell our clients: 'You've reached this point. You've planned for this,'" said Justin Owens, Seattle-based director of investment strategy at Russell Investments LLC. "Now, job one is to maintain your funded position, and there is a way to do that with asset allocation, particularly if you're a frozen plan or a mature closed plan. You can position your portfolio in such a way that the probability of the plan becoming underfunded again is very low."