Finally, some good news for pensioners, at least those who work for or used to work for large companies.
The strong stock market and rising interest rates more than halved the pension deficit for the 100 largest pension sponsors among publicly traded U.S. companies last year.
“This is good news for employers as stronger pension balance sheets will reduce required cash contributions in the near term while lower pension costs will improve corporate earnings,” said David Suchsland, senior consultant for Towers Watson, the company that did the new analysis.
The total pension deficit for the companies fell from $296 billion to $126 billion year over year at the end of 2013. That’s the smallest pension deficit since 2007, when plans had a surplus of $82 billion. The overall average funded status last year rose to 91 percent from 78 percent.
Average investment returns for plan sponsors were 10.8 percent. Companies are shifting their investment mix from stocks to fixed income and alternative investments in order to reduce investment risk.
Among the 100 plans analyzed, 22 were fully funded, up from just 5 at the end of 2012. In 2007, before the 2008 financial collapse, half the plans were fully funded.
Underfunded pension plans have recently become more expensive for companies. New regulations passed in last year’s federal budget substantially increased the premiums that companies must pay to the Pension Benefit Guarantee Corporation if their pension funds are not fully funded.
Plan sponsors contributed a total $27.8 billion to their pension funds, down from $45.2 billion in contributions in 2012 and the smallest amount since 2008. The median contribution was 60 percent more than the value of benefits accrued during the year.
Given the high cost of defined-benefit plans, companies are increasingly replacing them with defined-contribution plans such as 401(k)s in which employees bear more responsibility to save for their own retirement. Less than one third of Fortune 100 companies offered defined benefit pension plans to newly hired workers last year, down from 90 percent in 1985.
Top Reads from The Fiscal Times: