It was not a good year for pension funding.
From year-end 2013 to year-end 2014, the estimated aggregate funding level of pension plans sponsored by S&P 1500 companies dropped from 88% to 79%,
according to Mercer. Separately, Towers Watson examined pension plan data for the 411 Fortune 1000 companies that sponsor U.S. tax-qualified DB plans with a December fiscal year-end date, and found that the aggregate pension funded status is estimated to be 80% at the end of 2014, down from 89% at the end of 2013.
Rounding out the trifecta, the
Milliman 100 Pension Funding Index slipped to 83.6%, with declining discount rates (3.8% at the end of 2014, compared with 4.68% a year earlier) cited as driving down the funded ratio.
The
Towers Watson analysis also found that the pension deficit increased to $343 billion at the end of 2014, more than twice the deficit at the end of 2013, as overall pension plan funding weakened by $181 billion last year.
All three firms attributed the slippage to decreases in interest rates used to calculate corporate pension plan liabilities, while Mercer and Towers Watson also cited an increase in liability to reflect improved longevity. Mercer explained that Interest rates decreased by 88 basis points from 2013 year-end, reaching their lowest levels in 2014, offsetting the positive impact of the 11.4% gain in the S&P 500 index in 2014.
Towers Watson noted that a one-time strengthening of mortality assumptions alone was responsible for about 40% of the increased deficit in its analysis. Milliman’s 100 PFI hasn’t been adjusted for the new mortality assumptions, but the firm said its preliminary analysis of the impact indicated an estimated increase of 6% to 8% in pension liabilities. That would imply a PBO increase of up to $142 billion, an adjustment that Milliman said would decrease the funded ratio by over six percentage points (to 77.4%).
Towers Watson also noted that plan sponsors that used liability-driven investing (LDI) strategies in 2014 had better results, “as the declining discount rates were matched with very strong returns for long corporate and Treasury bonds.”
Mercer anticipates that most plan sponsors will adopt either new mortality tables reflecting improved mortality projections, such as the ones published by the Society of Actuaries earlier this year, or industry-specific mortality tables developed by Mercer in 2014.
