America’s big corporate pension plans didn’t look so good since before the 2008 financial crisis, and that’s good news for workers and employers.
The “financing” status of a pension is a key indicator of your health. It is a measure of the plan’s assets versus liabilities (how much money the plan needs to pay for future income). Pension plans that are less than 100% funded do not have enough money available to meet future retiree obligations.
The 100 largest public company pension funds in the US were 99.6% funded at year-end, their highest level since September 2008 , according to Milliman, a consulting firm. This is an increase of 90.3% at the end of 2020.
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The story is similar among a broader group of large Fortune 1000 companies. Their pensions were funded 96%, on average, last year, according to Willis Towers Watson, a consulting firm.
It is the highest level since late 2007 and a “strong” increase of 88% in 2020, according to their analysis.
The boost, largely as a result of stock and bond yields, offers some relief to retirees and workers who hope to live off their retirement income, experts said.
“The retiree will be more comfortable, there is something behind the promise,” said Philip Chao, a pension plan consultant for Experiential Wealth, based in Cabin John, Maryland.
The rapid improvement in pension funding in 2021 is largely due to strong equity returns and higher bond yields, according to Jennifer Lewis, senior director of retirement at Willis Towers Watson.
The S&P 500 Index rose 27% in 2021, its third consecutive positive year. US government bond yields ended 2021 at 1.5%, after starting the year below 1%; Investment grade corporate bond yields also rose .
This had a dual effect: Stock market returns supported pension assets, while bond returns reduced future pension liabilities.
“Bonds did well in the low interest rate environment, and stocks did even better,” said Chao. “That’s what’s happening”.
“We have certainly seen volatility in the past and we still hope to see that volatility in the future,” Lewis said of pension funds.
Some pension plan administrators have turned to more alternative investments like private equity and hedge funds since the financial crisis, according to the Center for Retirement Research at Boston College.
They are generally riskier than traditional stocks and bonds, but can offer higher returns or provide diversification benefits, the Center said.
Public pensions more than doubled their allocation to alternatives from 2005 to 2015, from 9% to 24%, according to the center.
Given the current health of the plan, companies may choose to switch some of their portfolios to less risky investments, such as bonds, to secure recent gains, Chao said.
The upgrade of large company plans also does not take into account the health of small business pension plans and public plans for municipal workers. However, they have likely improved as well given the similar dynamics governing those plans, Lewis said.