Pension Funding Levels Fell in 2014, Reversing Gains

Plan de-risking strategies to consider in 2015

By Stephen Miller Jan 6, 2015

The funded status of the largest U.S. corporate pensions reversed direction in 2014, dropping 9 percentage points as falling interest rates (which increase liabilities) and the impact of new mortality tables were only partially offset by strong returns on pension plan assets, according to a new analysis by consultancy Towers Watson.

The analysis examined pension plan data for the 411 Fortune 1000 companies that sponsor U.S. tax-qualified defined benefit pension plans and have a December fiscal-year-end date. Results indicate that the aggregate pension funded status was estimated to be 80 percent at the end of 2014, a decline from 89 percent at the end of 2013. Overall, pension plan funding weakened by $181 billion last year.

Fortune 1000 aggregate pension plan funding levels


Aggregate Funding Level









2014 (estimated)


Source: Towers Watson

“Despite a rising stock market in 2014, funding levels for employer-sponsored pension plans dropped back to what we experienced just after the financial crisis,” said Alan Glickstein, a senior retirement consultant at Towers Watson, in a media release. A strengthening of mortality assumptions by the Society of Actuaries in 2014, which required pensions to factor in longer expected life spans—and thus longer lifetime pension payouts—was responsible for about 40 percent of the increased deficit, Glickstein said.

“For most plan sponsors, the discussion around the Society of Actuaries’ new study on the mortality of pension plan participants was the most significant pension event of the year,” noted Dave Suchsland, a senior retirement consultant at Towers Watson. “The study drew the attention of plan sponsors and auditors, resulting in many plan sponsors updating that key assumption.”

Last year’s results surrendered most of the funded status gains earned in 2013, and “this year will most likely bring higher expense charges and unless there is an uptick in interest rates or equity market performance, eventually additional contribution requirements,” Suchsland said.

De-Risking Strategies

“We experienced another big year of pension de-risking in 2014, with significant lump-sum buyout and annuity purchase activity,” which transfers risk from the corporate plan sponsor to the insurer issuing the annuity, Suchsland added. “Given the change in funded status, we expect many plan sponsors will need to re-evaluate their retirement plan strategies in 2015.”

Along similar lines, at year-end 2014 Mercer, another HR consultancy, highlighted steps that plan sponsors can take to improve their funded position and manage pension risk in 2015. These include:

Re-evaluate the plan’s glidepath. “The recent publication of new mortality tables by the Society of Actuaries will increase reported liabilities for most plan sponsors by anywhere from 5 percent to 10 percent, with a corresponding reduction in reported funded status,” Mercer’s release noted. Sponsors should verify that the allocation and funded status points along the pension glidepath are still consistent with the new liability and end-state targets of the plan.

Develop an interest rate strategy. “Plan sponsors should have a strategy in place to deal with interest rate movements—good or bad,” Mercer advised. While 2015 might not feature systemic rises in rates, volatility could come into play as investors scrutinize the Federal Reserve’s announcements.

Keep a watchful eye on annuity prices. The large annuity deals in 2014 by Motorola and by Bristol-Myers Squibb have caught the eye of many plan sponsors. Mercer anticipates a significant uptick in retiree annuity buyouts in 2015, especially for frozen plans looking to take a step toward downsizing the plan without moving to a full plan termination. Moreover, “plan sponsors that intend to transfer risk to an insurer at a future date may want to invest assets to hedge against annuity price movements.”

Cashouts are still a viable strategy. A cashout program can still provide a sponsor the opportunity for significant savings from reduced Pension Benefit Guaranty Corp. (PBGC) premiums as well as administrative and investment costs associated with maintaining the assets and liabilities in the plan, Mercer noted.

Review the plan contribution policy. Legislation enacted in 2014 gave many sponsors more funding flexibility, with reduced minimum required contributions for the next few years. However most sponsors will eventually contribute a similar total amount to the plan whether they fund the minimum allowed or contribute at a steady pace. “Sponsors should consider whether they have greater flexibility now to contribute and gain tax deductions or, instead, they prefer to allow that opportunity to pass and await mandatory contributions,” Mercer said.

Review the investment portfolio. Sponsors should ensure that they are managing their investments wisely, given the amount of asset growth required to maintain funded status. “Step back and focus on strategy and make sure assets are managed in the most effective manner possible in the current environment,” Mercer advised. “At the total portfolio level, use market volatility to your advantage by rebalancing to asset allocation targets, which will increase returns and lower risk in the long term.”

Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow him on Twitter @SHRMsmiller.

Related External Article:

Pension Lump Sums Much More Expensive in 2015, Van Iwaarden Associates, December 2014.

Related SHRM Articles:

PBGC Eases 401(k) Rollovers to Traditional Pensions, SHRM Online Benefits, December 2014

Law to Let Multiemployer Pensions Cut Benefits Signed, SHRM Online Benefits, December 2014

Pension Smoothing Extended Without Premium Hike, SHRM Online Benefits, August 2014

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